May 03, 2018

When Federal Reserve Chair Janet Yellen left her post in 2018, she secured a spot at the Brookings Institution, a century-old research “think-tank” in the heart of Washington, D.C. Naturally, she also hit the speaking circuit. Her entrée into the upper echelons of revolving-door politics came with a hefty fee.

At a swanky locale in the ultra-expensive Tribeca neighborhood in New York City, Yellen soothed a bunch of A-list elites, saying that inflation wasn’t so high and that rate increases wouldn’t come too quickly. In doing so, she was simply following in the footsteps of her predecessor, Ben Bernanke. After leaving the same post, Bernanke launched his speaking career with, among others, a speech in the United Arab Emirates for which he was paid $250,000. This topped his yearly income at the Fed by 25 percent in one go.

While Bernanke scored big in the Middle East, Yellen’s talk was closer to home. Welcome to Wall Street, Janet. There was a reason for her landing in downtown Manhattan. She assured the well-coifed pack of 1 percenters that she could speak only for herself—it was important to distinguish that she would not be a brand ambassador on behalf of her successor (and once-upon-a-time number two guy) Jerome Powell. Yet, she knew that somehow her words would escape into the public ether.

They would be comforting words for the financial moguls. For the top 10 percent of the country that own 84 percent of the stock market, her remarks invoked confidence that the status quo of cheap money flowing from the Fed would be preserved. The boat would not be rocked. They could continue enjoying their meteoric rise from the depths of the financial crisis and know their money would remain safe after a decade of the Fed’s “quantitative easing” (QE) policies.

And let’s face it, the event went largely unnoticed. For Washington, the “Trump Show” is in town now. For Wall Street, even during the recent volatility waves, times are still relatively good. That’s why, especially now, understanding what is brewing inside and outside the Fed matters.

From the left to the right of the American political spectrum, few are questioning what the connection between the Fed’s largesse and the financial markets really means. The biggest banks have been experiencing largely unregulated, unlimited, support in the form of Fed policy that has nothing to do with saving, or helping, the Main Street economy.

You can look no further than the latest trend over the last year. The sheer record number of stock buybacks since the financial crisis from the banking sector and other corporate sectors is explosive. Heady stock market levels converted an influx of cheap money into a new kind of share value, one predicated on conjured capital.

Last year, the Fed blessed record stock buybacks for its members (private banks) without a word, let alone a demand, about using that money for true Main Street pursuits. The current Fed leader, Jerome Powell, and other incoming high-level Fed appointees have taken that a step further. They have now indicated that they want to further loosen the rules over what banks can do.

This year alone, the ongoing central bank policy (even with a few rate hikes along the way) is on pace to fuel over $1 trillion worth of U.S. S&P 500 corporate stock repurchases. This signals that if a bank—or major company—obtains minimal interest rates when borrowing money, they will borrow more.

They have and will continue to use that fresh debt to buy their own stocks, catapulting their CEOs and executives to ever higher compensation levels. Meanwhile, the taxpayers of America are left with a shrinking middle class and diminished economic upward mobility.

If you're a saver, you've probably noticed that you get essentially no interest on your savings account. That's because the Federal Reserve, the nation's central bank, keeps interest rates extremely low, thereby shoveling money to Wall Street and the nation's big banks. The European Central Bank and the Bank of Japan follow suit. This is all part of the financialization of the economy which fuels the economic divide between the 1%, who are the major beneficiaries of this policy, and the 99%, who actually do the work and provide the goods and services.

The Fed's policy of quantitative easing (QE), which refloated the bankrupt Wall Street banks after the financial crisis of 2008, has become the status quo today. Without it, Wall Street would collapse. The US dollar would collapse and plunge us into a worse depression than the Great One of the 1930s. Of course free money given to the banks does not translate into low interest rates for Joe and Jane Sixpack. They are still paying exorbitantly on their credit cards and student loans. Nothing is too good for the banking and financial class which preys on the folks who make up the real economy. When the next crash occurs, rich investors will buy up the resulting foreclosures and repossessed cars. More people will be forced out onto the streets. NIMBYs will prevent them from gaining a toehold anywhere.

Most of the assets - stocks, bonds and real estate - are owned by the 1%. Warren Buffet, one of the world's richest investors, has waxed poetic over the wealth that the US possesses in terms of the huge inventory of houses and automobiles. Sure there are a lot of both, but who owns them? If you're paying a mortgage or driving a car, the bank probably owns most of your house and most of your car. They just let you use them as long as you make your payments on time most of which is usually just interest.

The huge run-up in real estate and stock values has more to do with the free money floating around only for the use of the already rich. Some have suggested quantitative easing for the people or a guaranteed annual income or a universal basic income (UBI). That's not how the US economy works. Banks get bailed out; American citizens get sold out. Since the dollar reigns supreme in the rest of the world as the world's reserve currency, most other countries follow our lead. They basically kowtow to the US. However, things are changing on that score. The Chinese yuan is gaining steam as an international currency. In case you haven't noticed, China is a communist nation in terms of politics only. In terms of its economy it's a capitalist nation as are most nations of the world at this point.

While the Fed keeps expanding asset bubbles, there is no assurance that they will not pop some day. Until then housing will become increasingly unaffordable, the homeless population, which is a direct function of the unaffordability of real estate, will continue to grow and the divide between the very rich and the rest of us will increase.

On March 31 the Federal Reserve raised its benchmark interest rate for the sixth time in three years and signaled its intention to raise rates twice more in 2018, aiming for a Fed funds target of 3.5 percent by 2020. LIBOR (the London Interbank Offered Rate) has risen even faster than the Fed funds rate, up to 2.3 percent from just 0.3 percent 2 1/2 years ago. LIBOR is set in London by private agreement of the biggest banks, and the interest on $3.5 trillion globally is linked to it, including $1.2 trillion in consumer mortgages.

Alarmed commentators warn that global debt levels have reached $233 trillion, more than three times global GDP, and that much of that debt is at variable rates pegged either to the Fed’s interbank lending rate or to LIBOR. Raising rates further could push governments, businesses and homeowners over the edge. In its Global Financial Stability report in April 2017, the International Monetary Fund warned that projected interest rises could throw 22 percent of U.S. corporations into default.

Then there is the U.S. federal debt, which has more than doubled since the 2008 financial crisis, shooting up from $9.4 trillion in mid-2008 to over $21 trillion now. Adding to that debt burden, the Fed has announced it will be dumping its government bonds acquired through quantitative easing at the rate of $600 billion annually. It will sell $2.7 trillion in federal securities at the rate of $50 billion monthly beginning in October. Along with a government budget deficit of $1.2 trillion, that’s nearly $2 trillion in new government debt that will need financing annually.

If the Fed follows through with its plans, projections are that by 2027, U.S. taxpayers will owe $1 trillion annually just in interest on the federal debt. That is enough to fund President Trump’s original trillion-dollar infrastructure plan every year. And it is a direct transfer of wealth from the middle class to the wealthy investors holding most of the bonds. Where will this money come from? Even crippling taxes, wholesale privatization of public assets and elimination of social services will not cover the bill.

With so much at stake, why is the Fed increasing interest rates and adding to government debt levels? Its proffered justifications don’t pass the smell test.

‘Faith-Based’ Monetary Policy

In setting interest rates, the Fed relies on a policy tool called the “Phillips curve,” which allegedly shows that as the economy nears full employment, prices rise. The presumption is that workers with good job prospects will demand higher wages, driving prices up. But the Phillips curve has proved virtually useless in predicting inflation, according to the Fed’s own data. Former Fed Chairman Janet Yellen has admitted that the data fail to support the thesis, and so has Fed Governor Lael Brainard. Minneapolis Fed President Neel Kashkari calls the continued reliance on the Phillips curve “faith-based” monetary policy. But the Federal Open Market Committee (FOMC), which sets monetary policy, is undeterred.

“Full employment” is considered to be 4.7 percent unemployment. When unemployment drops below that, alarm bells sound and the Fed marches into action. The official unemployment figure ignores the great mass of discouraged unemployed who are no longer looking for work, and it includes people working part-time or well below capacity. But the Fed follows models and numbers, and as of this month, the official unemployment rate had dropped to 4.3 percent. Based on its Phillips curve projections, the FOMC is therefore taking steps to aggressively tighten the money supply.

The notion that shrinking the money supply will prevent inflation is based on another controversial model, the monetarist dictum that “inflation is always and everywhere a monetary phenomenon”: Inflation is always caused by “too much money chasing too few goods.” That can happen, and it is called “demand-pull” inflation. But much more common historically is “cost-push” inflation: Prices go up because producers’ costs go up. And a major producer cost is the cost of borrowing money. Merchants and manufacturers must borrow in order to pay wages before their products are sold, to build factories, buy equipment and expand. Rather than lowering price inflation, the predictable result of increased interest rates will be to drive consumer prices up, slowing markets and increasing unemployment—another Great Recession. Increasing interest rates is supposed to cool an “overheated” economy by slowing loan growth, but lending is not growing today. Economist Steve Keen has shown that at about 150 percent private debt to GDP, countries and their populations do not take on more debt. Rather, they pay down their debts, contracting the money supply. That is where we are now.

The Fed’s reliance on the Phillips curve does not withstand scrutiny. But rather than abandoning the model, the Fed cites “transitory factors” to explain away inconsistencies in the data. In a December 2017 article in The Hill, Tate Lacey observed that the Fed has been using this excuse since 2012, citing one “transitory factor” after another, from temporary movements in oil prices to declining import prices and dollar strength, to falling energy prices, to changes in wireless plans and prescription drugs. The excuse is wearing thin.

The Fed also claims that the effects of its monetary policies lag behind the reported data, making the current rate hikes necessary to prevent problems in the future. But as Lacey observes, GDP is not a lagging indicator, and it shows that the Fed’s policy is failing. Over the last two years, leading up to and continuing through the Fed’s tightening cycle, nominal GDP growth averaged just over 3 percent, while in the two previous years, nominal GDP grew at more than 4 percent. Thus “the most reliable indicator of the stance of monetary policy, nominal GDP, is already showing the contractionary impact of the Fed’s policy decisions,” says Lacey, “signaling that its plan will result in further monetary tightening, or worse, even recession.”

The largest U.S. lenders could each make at least $1 billion in additional pretax profit in 2018 from a jump in the London interbank offered rate for dollars, based on data disclosed by the companies. That’s because customers who take out loans are forced to pay more as Libor rises while the banks’ own cost of credit has mostly held steady.

During the 2008 crisis, high LIBOR rates meant capital markets were frozen, since the banks’ borrowing rates were too high for them to turn a profit. But U.S. banks are not dependent on the short-term overseas markets the way they were a decade ago. They are funding much of their operations through deposits, and the average rate paid by the largest U.S. banks on their deposits climbed only about 0.1 percent last year, despite a 0.75 percent rise in the Fed funds rate. Most banks don’t reveal how much of their lending is at variable rates or indexed to LIBOR, but Onaran comments:

JPMorgan Chase & Co., the biggest U.S. bank, said in its 2017 annual report that $122 billion of wholesale loans were at variable rates. Assuming those were all indexed to Libor, the 1.19 percentage-point increase in the rate in the past year would mean $1.45 billion in additional income.

While struggling with ultralow interest rates, major banks have also been publishing regular updates on how well they would do if interest rates suddenly surged upward. … Bank of America … says a 1-percentage-point rise in short-term rates would add $3.29 billion. … [A] back-of-the-envelope calculation suggests an incremental $2.9 billion of extra pretax income in 2017, or 11.5% of the bank’s expected 2016 pretax profit. …

About half of mortgages are … adjusting rate mortgages [ARMs] with trigger points that allow for automatic rate increases, often at much more than the official rate rise. …

One can see why the financial sector is keen for rate rises as they have mined the economy with exploding rate loans and need the consumer to get caught in the minefield.

Even a modest rise in interest rates will send large flows of money to the banking sector. This will be cost-push inflationary as finance is a part of almost everything we do, and the cost of business and living will rise because of it for no gain.

Cost-push inflation will drive up the consumer price index, ostensibly justifying further increases in the interest rate, in a self-fulfilling prophecy in which the FOMC will say: “We tried—we just couldn’t keep up with the CPI.”

A Closer Look at the FOMC

The FOMC is composed of the Federal Reserve’s seven-member Board of Governors, the president of the New York Fed and four presidents from the other 11 Federal Reserve Banks on a rotating basis. All 12 Federal Reserve Banks are corporations, the stock of which is 100 percent owned by the banks in their districts; and New York is the district of Wall Street. The Board of Governors currently has four vacancies, leaving the member banks in majority control of the FOMC. Wall Street calls the shots, and Wall Street stands to make a bundle off rising interest rates.

The Federal Reserve calls itself independent, but it is independent only of government. It marches to the drums of the banks that are its private owners. To prevent another Great Recession or Great Depression, Congress needs to amend the Federal Reserve Act, nationalize the Fed and turn it into a public utility, one that is responsive to the needs of the public and the economy.

Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including "Web of Debt" and "The Public Bank Solution."

December 11, 2017

The US national debt is about $20 trillion. That's money American tax payers owe to investors including foreign investors and governments. It is also money owed to other governmental agencies like the Social Security Trust Fund. About 30% of the national debt falls into this category. Of the remaining debt which is owned by the public, about half is owned by foreign investors and governments. Some people worry that the government will not be able to keep on borrowing money to roll over its debt which is added to each year by the deficit. People worry that foreigners will own the US.

Well, foreigners already do own much of the US. According to Robert Reich, about 35 percent of stock in U.S. corporations is now held by foreign investors. So if foreign governments and investors refused to buy any more Treasury bonds and wanted to cash out on the bonds they now own, the Federal Reserve would just print the money to pay them. So what would they do with the money then? They could either buy more US goods and services (unlikely) or they could buy more US assets as they already have been doing. So instead of owning just 35% of American corporations they might own practically all US corporations. However, the total value of the stock market is $25 trillion. Since foreigners own about $6 trillion of US debt, they could convert that to another approximately 30% ownership of the stock market. That would still leave about one third of US corporations owned by Americans.

So what? Who cares who owns American corporations? As Reich points out, corporations are global and have no particular allegiance to American taxpayers. In fact their whole aim is to avoid paying American taxes. Trump is about to give them their ultimate wet dream.

So what if the foreign owners of US debt, like China and Japan which each own about a trillion dollars of US Treasuries, took their money out of US debt and bought US real estate? They are already doing that of course. The solution would still be the same. The shortfall in selling new Treasury bonds to roll over old ones and pay interest would be made up by the Federal Reserve simply printing more money. Since the total value of US real estate is about $30 trillion, there is little to fear that foreign governments will soon be landlords to most American renters.

So what about that portion of the $5.6 trillion the US government owes to the Social Security Trust Fund and other governmental agencies? Again, if worse came to worse and investors, sovereign wealth funds and other domestic and foreign entities refused to loan us the money, the solution is the same: the Federal Reserve could just print it. Of course the Federal Reserve has already used this tactic of printing money when it bailed out the big Wall Street banks with its policy of quantitative easing. Quantitative easing has the secondary effect of keeping interest rates, and therefore US government deficits, low.

So if the Federal Reserve can print money, the question is why couldn't they spread some around to the American people in the form of a Universal Basic Income (UBI). American jobs are being displaced by robots so that the economic divide between rich and poor is growing. One way to redress the balance is to tax the rich and by means of various programs use the money to benefit the poor. Another way is for the Fed to just print the money ("helicopter money" some call it) and give it to the poor. This might cause some inflation, but again nothing serious.The money given to the big banks caused inflation in the asset markets (stock and real estate) but nobody worries about that. That's a far bigger threat to the US economy than the price of milk going up.

The real reason why the Fed won't use quantitative easing for the people is that the Fed is privately owned by the big Wall Street banks so they are not in the business of helping the people with their monthly bills. Secondly, if the American people could pay their bills, there would be much less debt. But debt is the main product of Wall Street banks. If there were no debt, Wall Street would not have a product to sell, and, therefore, would go broke. The less debt the American people are in, the less profits Wall Street makes.

A truly public central bank, one owned by the people not private corporations, could ease the indebtedness of the American people while, at the same time, easing the indebtedness of the US government. The judicious printing and the wise distribution of dollars could end the Web of Debt as Ellen Brown calls it.

October 08, 2017

By all accounts, Rex Tillerson has demoralized and degraded the State Department to the point of uselessness. Tom Price did much the same to Health and Human Services before jetting off. Scott Pruitt has moved rapidly to eliminate the “protection” aspect of the Environmental Protection Agency. And similar stories are unfolding throughout the executive branch.

Donald Trump has, in short, been like a Category 5 hurricane sweeping through the U.S. government, leaving devastation in his wake. And one question I don’t see being asked often enough is, will the same thing happen to the Federal Reserve? And if it does, how disastrous will that end up being for the world economy?

The Fed, which sets monetary policy, is by far our most important economic agency; its chairwoman (or chairman) is arguably the most powerful economic official in the world, more than the president himself. Its institutional status is peculiar: It isn’t exactly part of the executive branch, but it isn’t exactly independent, either. Its board members are appointed by the president subject to congressional approval, but have traditionally been technocrats expected to distance themselves from partisan politics.

That is, however, a norm rather than a legal requirement. And we know what tends to happen to norms in the Trump era.

For more than a decade the Fed chair has been a distinguished academic economist — first Ben Bernanke, then Janet Yellen. You might wonder how such people, who have never been in the business world, who have never met a payroll, would deal with real-world economic problems; the answer, in both cases: superbly.

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Kevin Warsh is considered a top candidate to lead the Federal Reserve.CreditDaniel Acker/Bloomberg

July 15, 2017

Japan has found a way to write off nearly half its national debt without creating inflation. We could do that too.

Let’s face it. There is no way the US government is ever going to pay back a $20 trillion federal debt. The taxpayers will just continue to pay interest on it, year after year.

A lot of interest.

If the Federal Reserve raises the fed funds rate to 3.5% and sells its federal securities into the market, as it is proposing to do, by 2026 the projected tab will be $830 billion annually. That’s nearly $1 trillion owed by the taxpayers every year, just for interest.

Personal income taxes are at record highs, ringing in at $550 billion in the first four months of fiscal year 2017, or $1.6 trillion annually. But even at those high levels, handing over $830 billion to bondholders will wipe out over half the annual personal income tax take. Yet what is the alternative?

Japan seems to have found one. While the US government is busy driving up its “sovereign” debt and the interest owed on it, Japan has been canceling its debt at the rate of $720 billion (¥80tn) per year. How? By selling the debt to its own central bank, which returns the interest to the government. While most central banks have ended their quantitative easing programs and are planning to sell their federal securities, the Bank of Japan continues to aggressively buy its government’s debt. An interest-free debt owed to oneself that is rolled over from year to year is effectively void – a debt “jubilee.” As noted by fund manager Eric Lonergan in a February 2017 article:

The Bank of Japan is in the process of owning most of the outstanding government debt of Japan (it currently owns around 40%). BoJ holdings are part of the consolidated government balance sheet. So its holdings are in fact the accounting equivalent of a debt cancellation. If I buy back my own mortgage, I don’t have a mortgage.

If the Federal Reserve followed the same policy and bought 40% of the US national debt, the Fed would be holding $8 trillion in federal securities, three times its current holdings from its quantitative easing programs.

June 13, 2017

Higher interest rates will triple the interest on the federal debt to $830 billion annually by 2026, will hurt workers and young voters, and could bankrupt over 20% of US corporations, according to the IMF. The move is not necessary to counteract inflation and shows that the Fed is operating from the wrong model.

An increase in the base rate, however small, will tighten the screw on younger voters and some of the poorest communities who voted for him and rely on credit to get by.

More importantly for his economic programme, higher interest rates in the US will act like a honeypot for foreign investors . . . . [S]ucking in foreign cash has a price and that is an expensive dollar and worsening trade balance. . . . It might undermine his call for the repatriation of factories to the rust-belt states if goods cost 10% or 20% more to export.

In its Global Financial Stability report in April, the International Monetary Fund issued another dire warning: projected interest rises could throw 22% of US corporations into default. As noted on Zero Hedge the same month, “perhaps it was this that Gary Cohn explained to Donald Trump ahead of the president’s recent interview with the WSJ in which he admitted that he suddenly prefers lower interest costs.”

But the Fed was undeterred and is going full steam ahead. Besides raising the fed funds rate to a target of 3.5% by 2020, it is planning to unwind its massive federal securities holdings beginning as early as September. Raising interest rates benefits financial institutions, due to a rise in interest on their excess reserves and net interest margins (the difference between what they charge and what they pay to depositors). But borrowing costs for everyone else will go up (rates on student loans are being raised in July), and the hardest hit will be the federal government itself. According to a report by Deloitte University Press republished in the Wall Street Journal in September 2016, the government’s interest bill is expected to triple, from $255 billion in 2016 to $830 billion in 2026.

The Fed returns the interest it receives to the Treasury after deducting its costs. That means that if, rather than dumping its federal securities onto the market, it were to use its quantitative easing tool to move the whole federal debt onto its own balance sheet, the government could save $830 billion in interest annually – nearly enough to fund the president’s trillion dollar infrastructure plan every year, without raising taxes or privatizing public assets.

That is not a pie-in-the-sky idea. Japan is actually doing it, without triggering inflation. As noted by fund manager Eric Lonergan in a February 2017 article, “The Bank of Japan is in the process of owning most of the outstanding government debt of Japan (it currently owns around 40%).” Forty percent of the US national debt would be $8 trillion, three times the amount of federal securities the Fed holds now as a result of quantitative easing. Yet the Bank of Japan, which is actually trying to generate some inflation, cannot get the CPI above 0.2 percent.

The Hazards of Operating on the Wrong Model

The Deloitte report asks:

Since the anticipated impact of higher interest rates is slower growth, the question becomes: why would the Fed purposely act to slow the economy? We see at least two reasons. First, the Fed needs to raise rates so that it has room to lower them when the next recession occurs. And second, by acting early, the Fed likely hopes to choke off inflationary pressure before it starts to build.

Rates need to be raised so that the recession this policy will trigger can be corrected by lowering them again – really? And what inflation? The Consumer Price Index has not even hit the Fed’s 2% target rate. Historically, when interest rates have been raised in periods of tepid growth, the result has been to trigger a recession. So why raise them? As observed in a June 2 editorial in The Financial Times titled “The Needless Urge for Higher Borrowing Costs”:

In this context, the apparent determination of the Fed in particular to press on with interest rate rises looks a little peculiar. Having created expectations that it was likely to tighten policy with three quarter-point increases over the course of 2017, the Fed is acting more like a party to a contract that feels the need to honour its terms, than a central bank that takes the data as it finds them. [Emphasis added.]

In the six months since President Trump was elected, the Fed has pressed on with two rate hikes and is proceeding with a third, evidently just because it said it would. Impatient bond investors are complaining that it has found one excuse after another to postpone the “normalization” it promised when market conditions “stabilized;” and in his presidential campaign, Donald Trump attacked Janet Yellen personally for keeping rates low, putting her career in jeopardy. She has now gotten with the program, evidently to restore the Fed’s waning credibility and save her job. But the question is, why did the Fed promise these normalization measures in the first place? As then-Chairman Ben Bernanke explained its “exit strategy” in 2009:

At some point, . . . as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. . . . [B]anks currently hold large amounts of excess reserves at the Federal Reserve. As the economy recovers, banks could find it profitable to be more aggressive in lending out their reserves, which in turn would produce faster growth in broader money and credit measures and, ultimately, lead to inflation pressures.

The Fed evidently believes that the central bank needs to tighten monetary policy (raise interest rates and sell its bond holdings back into the market) because the massive “excess reserves” held by the banks (currently ringing in at $2.2 trillion) will otherwise be lent into the economy, expanding the money supply and triggering hyperinflation. Which, as David Stockman puts it, shows just how clueless even the world’s most powerful central bankers can be in matters of banking and finance . . . .

Banks Don’t Lend Their Reserves

There need be no fear that banks will dump their excess reserves into the market and create “inflation pressures,” because banks don’t lend their reserves to their commercial borrowers. They don’t because they can’t. The only thing that can be done with money in a bank’s reserve account is to clear checks or lend reserves to another bank. Reserves never leave the reserve system, which is simply a clearing mechanism set up by the central bank to facilitate trade among banks. Technically, dollars leave the system when a depositor pulls money out of the bank in cash; but as soon the money is spent and redeposited, these Federal Reserve Notes go back into the banking system and again become reserves.

Not only do banks not lend their reserves commercially, but they do not lend their deposits. Banks create deposits when they make loans. As researchers at the Bank of England have acknowledged, 97 percent of the UK money supply is created in this way; and US figures are similar. Banks do not need reserves or deposits to make loans; and since they are now flooded with reserves, they have little incentive to pay interest on the deposits of “savers.” If they do not have sufficient incoming deposits at the end of the business day to balance their outgoing checks, they can borrow overnight in the fed funds market, where banks lend reserves to each other.

At least they used to do this. But since the Fed began paying Interest on Excess Reserves (IOER) in 2008, they have largely quit lending their reserves to each other. They are just pocketing the IOER. If they need funds, they can borrow more cheaply from the shadow banking system – the Federal Home Loan Banks (which are not eligible for IOER) or the repo market.

So why is the Fed paying interest on excess reserves? Because with the system awash in $2.2 trillion in reserves, it can no longer manipulate its target fed funds rate by making reserves more scarce, pushing up their price. So now the Fed raises the fed funds rate by raising the interest it pays on reserves, setting a floor on the rate at which banks are willing to lend to each other – since why lend for less when you can get 1.25% from the Fed?

That is the theory, but the practical effect has been to kill the fed funds market. The Fed has therefore implemented a new policy tool: it is “selling” (actually lending) its securities short-term in the “reverse repo” market. The effect is to drive up the banks’ cost of borrowing in that market; and when this cost is passed on to commercial borrowers, market rates are driven up.

Meanwhile, the Fed is paying 1% (soon to be 1.25%) on $2.2 trillion in excess reserves. At 1%, that works out to $22 billion annually. At 1.25%, it’s $27.5 billion; and at 3.5% by 2020, it will be $77 billion, most of it going to Wall Street megabanks. This tab is ultimately picked up by the taxpayers, since the Fed returns its profits to the government after deducting its costs, and IOER is included in its costs. Among other possibilities, an extra $22 billion annually accruing to the federal government would be enough to end homelessness in the United States. Instead, it has become welfare for those Wall Street banks that largely own the New York Fed, the largest and most powerful of the twelve branches of the Federal Reserve.

Paying IOER is totally unnecessary to prevent inflation, as evidenced again by the case of Japan, where the Bank of Japan is actually trying to fan inflation and is now charging banks 0.1% rather than paying them on their excess reserves. Yet the inflation rate refuses to rise above 0.2%.

Banks cannot lend their reserves commercially and do not need to be induced not to lend them. The Fed’s decision to raise rates by increasing IOER just increases public and private sector borrowing costs, slows the economy, threatens to bankrupt businesses and consumers, and gives another massive subsidy to Wall Street.

May 15, 2017

After the Great Recession of 2008, the privately owned central bank of the US, the Federal Reserve, found a new way to get the economy moving again. They would simply create money and give it to the large Wall Street banks and even to some foreign banks like Deutsche bank. This newly created money would allow the big banks to cover all their collateralized debt obligations, interest rate swaps and other risky derivatives that had gone sour. They paid cash and then took the banks' risky trash onto their own, namely the Feds', balance sheet in the expectation that some day they would get rid of the stuff by selling it back into the market and then extinguish the cash which had been created with a few computer keystrokes. Here we are nine years after the massive bail-out of the big banks, and the Fed's once radical policy to save the world's financial system has become the status quo. The initial fear was that printing all that money and then effectively giving it to the Big Banks would create all kinds of inflation which money printing had done in the past most notably during the hyperinflation in Germany after the First World War.

US Fed Money Printing Didn't Cause Inflation Why?

So the fear of inflation turned out to be groundless because the Fed didn't spend that money into the everyday economy. They didn't help out Joe Six Pak. They didn't help out those with underwater mortgages. Essentially they gave all the money to rich people, and by this device averted inflation. Hmmm, said the Fed. We found out that, as long as you print money and give it to the Big Banks i.e. rich people, the money printing won't be inflationary. Instead, the Fed was successful in reinflating the economy as we had known it before the Great Recession. They created an asset bubble in the stock market since all this cash that had been given to rich people (also know as investors) found its way back into the stock market. The Big Banks had been bailed out. The world economic system was no longer in danger of collapse so things could hum along nicely with business as usual. The Fed was confident in the knowledge that it could print money at will as long as it gave that money to people who were already rich, and, therefore, wouldn't spend it in the real economy. These people would only invest it.

Economic Reality for the Little Guy

So the Fed in their basic function to prop up the Big Banks, and to hell with the little guy, adopted the policy of ongoing cash infusions to the Big Banks known as Quantitative Easing. They continued to buy on a monthly basis the bad debts of the banks thus continually infusing them with new cash. In addition they kept interest rates near zero. This allowed the banks to borrow money at extremely low rates and loan it out at much higher rates thus adding additionally to their bottom lines. The debt based economy was again in full swing. GDP continued to go up. The Fed knew that, if there were another recession, it could bail out the Big Banks again by just printing more money and inflation would not be a problem as long as the money went to rich people and was not spent into the real economy like job creation by a government program would do. The little guy would just have to be satisfied with being a permanent debtor. This was his role: to keep the economy going by borrowing money to consume more since consumption is 2/3 of GDP.

Student Loan Debt Hits $1.4 Trillion

The little guys, convinced they needed a college education, continued to borrow money and go into debt just to pay for the promise of a college degree and a good job one day. The poorer the person was, the more student loan debt they would have to go into, and the more motivated they were to pull themselves out of poverty. Car loans and credit card debt continued apace building up the debt based economy. Even car title loans based on equity in a car came into play.

Wall Street continued to play derivative games with all that debt turning it into asset backed securities and offloading it onto investors. Keeping interest rates low meant that savers were essentially screwed. Older Americans with savings accounts but no stocks got what amounted to no interest on their savings. So they were forced to go into the stock market thereby adding to Wall Street profits. Pension funds could not increase the value of their funds with conventional safe investments so they had to deal in riskier financial instruments as well.

Fed Policy Drives Economic Inequality

Fed policy is exacerbating income and wealth inequality since it basically gives money to rich people - to Wall Street and not to Main Street. And why should they give money to the little guy? They are a wholly owned subsidiary of Wall Street. They are a private entity not a publicly owned asset. They look out for the people who own them and nobody else. They are convinced that the USA and the world will keep running along very smoothly as long as there is no inflation which would occur if they gave money not to the rich but to the poor or middle class. That would drive up wages and create what economists fear most: wage inflation! The prevailing wisdom has replaced the conventional Keynesian wisdom which was to prime the pump by putting money into the little guy's hands. They know that now they can print as much money as they like as long as they give it to the already rich and no inflation will occur. As far as their supposed mandate to keep unemployment low, there is enough demand for low paying service jobs to do that even though the higher paying manufacturing jobs have by and large disappeared. So unemployment of the masses is not a problem. So what if a good paying job is replaced by a low paying job. That still counts as one unit of employment as far as the unemployment statistics are concerned.

The Fed has not even announced the framework of what its balance sheet "normalization" would look like, and already Boston Fed president Rosengren is talking about the next Fed QE program.

In a speech titled “The Federal Reserve Balance Sheet and Monetary Policy” delivered to Bard College on Wednesday afternoon, Rosengren said that structural changes in the macroeconomy "may necessitate more frequent use of large-scale asset purchases during recessions" and he said it is "quite likely" that the use of central bank balance sheets will be necessary in future economic downturns.

The reason? A combination of low inflation, low rates of productivity growth, and slow population growth may imply an economy "where equilibrium short-term interest rates remain relatively low" by historical standards. In other words, the natural rate, or r-star, is so low, the Fed will only be able to hike rates a handful of times before it tips the economy over into contraction, requiring a new easing regime.

As a result, reductions in short-term rates to combat recessions will encounter the zero boundary and "will not be sufficient," Rosengren said – so "it is likely to be more common for central banks to engage in asset purchases to stimulate the economy by reducing longer-term rates."

Long story short: the Fed can only raise interest rates a small amount before they have to lower them again due to a looming recession. There is not enough interest rate leverage to keep the economy going so quantitative easing will continue to be the main tool in their toolbox.

As Long as People Keep Borrowing Money to Consume, Wall Street Will Be Happy

It's just Wall Street's job to keep the money spigot open. They need to keep money in the form of loans flowing. Then people will have every consumer item they desire, and they will continue to be in debt to Wall Street. The prevailing debt based model will continue to work until it doesn't. At that point there will be another financial crisis, but the Fed will just print money, give it to the banks and - voila! - the crisis will be over. The net result is that debtors will lose whatever items secured their debt including houses, cars and other assets. So the investor class will take over ownership and former middle class owners will in turn become renters. Eventually, all debtors will lose what they thought they owned because they are in over their heads and cannot make the payments.

The National Debt - No Problem

Conservatives used to be all upset over the $20 trillion national debt, but no more! They know the Fed can print any amount of money to make payments on the debt. There is nothing to fear about money running out. It has nothing to do with GDP or taxes. In fact the Fed could go from $4.5 trillion on its balance sheet to $20 trillion, the size of the national debt, without any problems as long as they keep feathering the nests of the rich. That would mean more billionaires and a greater wealth and income gap with the middle class. Current Fed policy will only fuel economic inequality, but they don't care about economic inequality. Their mandate only mentions inflation and unemployment. As long as they keep those two things in check, they are only too happy to create more billionaires and support financial manipulation as a source of wealth. After all they are owned by the very rich Wall Street billionaires who benefit from their policies.

A Problem Emerges: Central Banks Injected A Record $1 Trillion In 2017... It's Not Enough

The experts are now predicting that the Fed can't raise interest rates much or the whole stock market asset bubble will explode. If that were to happen, we'd be right back in another Great Recession or worse. So now the world's central banks are at the behest of Wall Street and other world financial centers such as the City of London.

Former Republican Tax Hawks Now in Favor of Cutting Taxes on the Rich and To Hell With the National Debt

In their perennial bait and switch on budget deficits, Republicans who criticized the Obama administration for overspending, now are content to run up the deficit even more as long as they get their tax cuts for the rich and increased military spending. Oh and the border wall, a completely superfluous and gratuitous expenditure.

From an office high above Manhattan, the billionaire Peter G. Peterson has warned for years that the federal government is borrowing too much money. So have other Republican grandees, like former Senator Alan K. Simpson, who made dire predictions about the federal debt in a 2010 report. Republicans in Congress have been eager to sing from the same hymnal so long as a Democrat was in the White House.

But when Republicans take charge, their fiscal rectitude sometimes starts to waver. The broad Republican support this week for President Trump’s plan to sharply reduce taxes suggests that those who hang on to austere concerns about debt will now be facing former allies who want to chase economic growth.

Some Republicans are rallying around the idea that less taxation is more important than less debt, just as they did during the Republican presidencies of Ronald Reagan and George W. Bush. That shift is a break with the die-hard hawks of the anti-deficit industrial complex, who have long warned of calamitous consequences to the American economy.

“This is about math, not mystery and magic,” said Mr. Simpson, who was a chairman of President Barack Obama’s bipartisan commission on the federal debt in 2010. “It’s madness to think that you can have a tax cut without some reduction in spending or some increase in revenue.”

Mr. Trump’s proposal, while short on details, calls for cutting taxes on corporations and individuals, including reducing the corporate tax rate from 35 percent to 15 percent and doubling the size of the standard deduction for individuals. Analysts estimated that it could add as much as $7 trillion over a decade to the federal debt, depending on what Congress eventually packs into a tax bill.

So Republicans care more about their tax cuts than they do about the National Debt. Who knew? But they do care about it if there is a Democratic administration in charge. They love tax cuts, but they hate Democratic government programs to help the poor and middle class. They hate anything public and that includes public schools, public parks, public roads, public libraries etc etc. You get the picture. They want to shrink government down to the size where "you can drown it in a bathtub." Overspending on tax cuts suits their agenda entirely because in a few years they'll be saying, "There's not enough money for social security or Medicare (two programs they really want to get rid of) or anything else except the military." By then the Trump administration will have gotten rid of all regulations thus creating a veritable "Buyer Beware" economy whether it comes to food, water, medical care, toys, air bags or anything else.

The Brave New World of American Capitalism

So the American consumer will be bought off with cheaper goods produced by low paid workers in other countries or robots, whichever is cheaper. No inflation here either in the price of stuff or in wages. The rich will continue their function of keeping the economy going by investing in asset bubbles. From time to time the Big Banks will totter on the brink of failure but will be bailed out by the Fed. Debts will be exinguished by foreclosure and bankruptcy which will only add to the largesse of the investor class which will be able to pick up assets like houses at bargain basement prices. The middle class will become renters and the poor will become homeless. That's the new reality.

Steve Fraser in his book, "The Age of Acquiescence," talks about how the former proletariat has become a precariat, working in the gig economy without unions, without worker protections, totally free in their labor, not having a boss standing over them. Labor just like capital has been freed from restraints and constraints, from regulations, from obligations. In this economy one might have to work 2 or 3 gig like jobs, but that's OK as long as one's role as a consumer promises that new and exciting purchases can be had relatively cheaply. Consumers have been bought off so that there's no need to struggle for social justice. What more could a person possibly want?

May 24, 2016

All indications are that our biggest buddy in the Middle East, Saudi Arabia, was directly involved with the 9/11 hijackers, and what's more, exports its extreme form of Islam, Wahhabism, to al Qaeda, ISIS and other groups determined to wipe out the West and Western values. There are 28 pages of the 9/11 report that deal directly with the Saudi role that so far have not been released. They have been redacted because the US relationship with the Saudis would be in jeopardy if they were to be released.

Last week the US Senate passed a bill that would let families of US victims of 9/11 sue the Saudis if they were found to be responsible for 9/11. The Saudis have gone so far as to say that, if the bill became law, they would dump $750 billion worth of US Treasury bonds on the world market. That would blow up not only our relationship with the Saudis, but the world financial system which is predicated on the US dollar being the world's reserve currency and its being necessary for the purchase of oil. That's why other countries that buy oil on the world markets have to hold dollars.

We have been taught to love the Saudis and hate ISIS. Brutal beheadings are shown on the evening news carried out by ISIS. Yet we are never shown a beheading by the Saudis which happens all the time. They're just not videotaped, that's all. The Saudis operate under Sharia law just like ISIS does. A contractor told me recently of his time in Riyadh where the half time entertainment at soccer games was beheadings. Instead of a concert by Beyonce, they'd clear the soccer field, have a beheading or two, then bring back the players for the second half. That's their half time entertainment! Saudi Arabia carried out at least 157 executions in 2015. Yet none of our public officials mention this fact. Beheading is the form of execution in Saudi Arabia, and, according to my friend, it can be for as trivial a peccadillo as embarrassing someone's daughter! After the beheadings the Saudis put the headless bodies on display by hanging them around the city.

The government of Saudi Arabia beheaded forty-seven people on terror charges in a single day at the start of 2016, in the kingdom’s largest wave of executions in more than three decades. Saudi schoolchildren are taught that beheading Christians, Jews and Shiites is just fine and dandy. And these are our so-called "friends" in the middle east!

Every woman in America and the West should be outraged by how the Saudis treat women. They aren't allowed to drive for starters. A hidden camera videotaped a woman being shoved to the ground in a supermarket, her groceries scattered all over the floor, simply because she got in the way of a man. Saudi dissidents secretly videotaped the Saudi religious police - the Committee for the Promotion of Virtue and the Prevention of Vice, whose job it is to patrol the shopping malls and streets looking for transgressions, accosting a woman for wearing make-up. If they show a few strands of hair which are not covered up by their hijabs and burkas, they could be whipped. Western women rejoice, your lot in life, although not perfect, is vastly superior to your counterparts in the middle east.

President Nixon Sealed the Deal With King Faisal

The deal "oil for dollars" was made by none other that the "deal with the devil" boy, Richard Nixon, himself. In 1973 then President Nixon asked King Faisal of Saudi Arabia to accept only US dollars as payment for oil and to invest any excess profits in US Treasury bonds, notes, and bills. In exchange, Nixon pledged to protect Saudi Arabian oil fields from the Soviet Union and other interested nations, such as Iran and Iraq. It was the start of the deal with the devil. Here is the short version of the sick system we now operate under:

The short version of the story is that a 1970s deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on the all-important oil trade the US dollar slowly but surely became the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar's value up, up, and away. In addition, countries stored their excess US dollar savings in US Treasuries, giving the US government a vast pool of credit from which to draw.

That explains why the US has been able to run humongous deficits year after year. Other countries that need dollars are more than happy to park their money in dollar denominated US Treasury bonds. If the Saudis decide they don't want to play this game any longer, dump their $750 billion of US Treasuries and start accepting other currencies as payment for oil, other countries will start dumping their US Treasury bonds. At that point there won't be much of a market for US bonds, and the US might have to stop running deficits and pay as it goes.

So what happens when major countries of the world decide they can obtain oil through various agreements that don't require the US dollar? All that borrowed money that the US has been using and running up sky high national debts and deficits with will represent the chickens coming home to roost. The US won't be able to sell any more Treasury bonds in order to continue running up deficits. The world's reserve currency, the dollar, will have to share the stage with other reserve currencies which are now building up.

The world financial system, which gave the US all kinds of advantages over other countries, will be in disarray. The value of the dollar will collapse. But not to worry. The Fed can just print more dollars to pay off our creditors. That will last for a while but not for long. Eventually, after a long, hard night, the US will have to get its act together and pay as it goes, not dependent on credit from petrodollars. US world hegemony will be kaput. This will inevitably happen anyway as the world transforms from a dependency on fossil fuels and transitions to renewable forms of energy. The byproduct will be that the dollar will no longer be the world's reserve currency and the US deal with the devil will be moot.

The San Diego Connection

OK, let's bring this back to the present day and the aforementioned 28 pages that have been redacted from the 9/11 report. The Saudis don't want them ever to see the light of day because the Saudis were complicit in the 9/11 bombings. 15 of the 19 hijackers were Saudis. Two Saudis that landed in San Diego before the bombings took place and later became hijackers were given financial support by high ranking members of the Saudi government.

Sources who have leaked some of the contents of the 9/11 report say that there is “incontrovertible evidence” gathered from both CIA and FBI case files of official Saudi assistance for at least two of the Saudi hijackers who settled in San Diego. There was a flurry of pre-9/11 phone calls between one of the hijackers’ Saudi handlers in San Diego and the Saudi Embassy, and the transfer of some $130,000 from then Saudi Ambassador Prince Bandar’s family checking account to yet another of the hijackers’ Saudi handlers in San Diego.

Former FBI agent John Guandolo, who worked 9/11 and related al Qaeda cases out of the bureau’s Washington field office, says Bandar should have been a key suspect in the 9/11 probe.

“The Saudi ambassador funded two of the 9/11 hijackers through a third party,” Guandolo said. “He should be treated as a terrorist suspect, as should other members of the Saudi elite class who the US government knows are currently funding the global jihad.”

But Bandar held sway over the FBI.

After he met on Sept. 13, 2001, with President Bush in the White House, where the two old family friends shared cigars on the Truman Balcony, the FBI evacuated dozens of Saudi officials from multiple cities, including at least one Osama bin Laden family member on the terror watch list. Instead of interrogating the Saudis, FBI agents acted as security escorts for them, even though it was known at the time that 15 of the 19 hijackers were Saudi citizens.

“The FBI was thwarted from interviewing the Saudis we wanted to interview by the White House,” said former FBI agent Mark Rossini, who was involved in the investigation of al Qaeda and the hijackers. The White House “let them off the hook.”

So it's good ole Bush who lied us into the war in Iraq who knew good and well who the culprits were in the 9/11 attack, yet acted as their protector. He even flew members of the bin Laden family out of the country before bin Laden was even a suspect. “Even though American airspace had been shut down,” Sky News reported, “the Bush administration allowed a jet to fly around the US picking up family members from 10 cities, including Los Angeles, Washington DC, Boston and Houston.” “Two dozen members of Osama bin Laden’s family were urgently evacuated from the United States in the first days following the terrorist attacks on New York and Washington,” CBS reported.

Is this all starting to make sense? Republican President Richard Nixon took us off the gold standard, then made a deal with the Saudis so that all transactions for oil would have to be paid in dollars, then he and subsequent US Presidents used the enormous resulting credit and appetite for Treasuries to run up the US national debt. This was followed by President George W Bush's complicity in the 9/11 attacks by protecting the Saudis and letting Saudi officials and the bin Laden family off the hook instead of investigating them. Then, knowing full well who was responsible for 9/11, Bush went to war with a nation that was totally innocent of 9/11 and killed its leader thus unleashing chaos in the middle east culminating in the European refugee crisis. Finally, the cover-up was complete when the 28 pages were redacted during the Bush administration. The release of this information would probably not only implicate the Saudis but their best buddy, George W Bush, as well.

Last Tuesday the US Senate passed a bill that would let US citizens who were victims of 9/11 sue Saudi Arabia. President Obama has said that, even if the bill should pass the House, he would veto it. Why? Because he doesn't want to upset the world's financial apple cart. He doesn't want the Saudis dumping $750 billion worth of US Treasuries on the world market. He doesn't want the Saudis accepting Japanese yen and European euros in exchange for oil. He doesn't want the BRICS countries New Development Bank becoming a rival to the IMF and World bank. He doesn't want the US to lose its hegemony over the world economy. Finally, he doesn't want the US to have to live within its own means and pay its own debts.

January 28, 2016

Oil is less than $30. a barrel. This is over three times less than what it costs just to buy the barrel itself! Iran has been accepted back into the world community and is revving up to sell its oil on the world market which will bring down the price of oil even more. Frackers and oil producers in the US have taken on a huge amount of debt under the assumption that it would pay off down the road. They hadn't counted on the price of oil plummeting. What will they do when we convert 100% to renewables?

The debt overhang in the US economy is, as The Donald would say, UUUUGE! All the Wall Street banks and hedge funds, which have bet on the US becoming oil independent and have bought derivatives up the ying yang, are on the losing end of their bets. This presages a crash similar to the mortgage based crash of 2008. Then the Big Banks will ask for another bailout. Or maybe they won't ask; they'll just tell us that we're bailing them out because, after all, they run the government.

Goldman Runs the Government While Committing Fraud

Goldman Sachs runs the government's finance department. Treasury Secretaries Robert Rubin (1995-99) and Hank Paulson (2006-2009) were at Goldman from 1966 to 1992 and 1974 to 2006 respectively. At Treasury, Paulson was aided by Chief of Staff Mark Patterson (Goldman lobbyist 2003-2008), Neel Kashkari (Goldman Vice President 2002-2006) , Under-Secretary Robert K Steel (Vice Chairman at Goldman, where he worked from 1976 to 2004), and advisors Kendrick Wilson (at Goldman from 1998 to 2008) and Edward C Forst (former Global Head of Goldman's Investment Management Division).

Paulson's successor, Timothy Geithner, a protege of Robert Rubin, was kept close to the Goldman fold with the usual tactic of paying him lucrative speaking fees, the same tactic they use to keep Hillary's ear. I could go on with Goldman's connections to the US government, but I don't want to bore you. For a fuller account I refer you to Michael Hudson's book, Killing the Host, How Financial Parasites and Debt Destroy the Global Economy.

This January 2016 Goldman admitted to committing massive fraud and was fined $5 billion. The Wall Street firm had agreed with federal prosecutors and regulators to resolve claims stemming from the marketing and selling of faulty mortgage securities to investors. These are the people who are running your democratic (ha, ha) government. While the 99% got screwed, Wall Street got bailed out because they ARE the government.

But not to worry. This looming market crash is a problem for the big guys, the billionaires, the investor class, not the 99%. The mortgage defaults of 2008, on the other hand, brought real pain to the middle class. While the banks got bailed out, the average middle class homeowner did not. HAMP, the Home Affordable Mortgage Program which was supposed to help homeowners stay in their homes with loan modifications, was a colossal failure.

The program gave permanent mortgage modifications to 1.3 million people, but 350,000 of them defaulted again on their mortgages and were evicted from their homes. Fewer than one million homeowners remain in the HAMP program – just a quarter of its target – and $28 billion of the funding remains unspent. The HAMP program, supposed to help homeowners save their houses, may have led them deeper into a bureaucratic swamp.

401ks - the Worst Idea Perpetrated on the American People

Now that that crisis has settled down, the main worry of the middle class is that, when the stock market tanks, so will their 401k. 401ks were one of the worst travesties visited on the average American worker. Folks lucky enough to have traditional pensions don't have to worry especially if it's a government pension. On the other hand those with traditional pensions from corporations have to worry about corporate raiders and hedge fund takeover artists raiding their pension funds. Those with 401ks are taking all the risk in their individual portfolios over which they have no control really. They are at the mercy of the market and Wall Street. God help them.

There is also widening inequality which means that American consumers have less money to spend to keep the economy going. US GDP depends on consumer purchases because they are 70% of the economy. If everyone goes to ground and starts growing their own vegetables and keeping their own chickens, all those nonpurchases at the supermarket will drive the economy down. 2015 was a big year for car sales; that means that 2016 will not be because consumers are carred up.

Consider: The median wage is 4 percent below what it was in 2000, adjusted for inflation. The median wage of young people, even those with college degrees, is also dropping, adjusted for inflation. That means a continued slowdown in the rate of family formation—more young people living at home and deferring marriage and children – and less demand for goods and services.

At the same time, the labor participation rate—the percentage of Americans of working age who have jobs—remains near a 40-year low.

The giant boomer generation won’t and can’t take up the slack. Boomers haven’t saved nearly enough for retirement, so they’re being forced to cut back expenditures.

Wall Street and hedge funds are running the economy. They are the central planners not the US government which is basically just a pawn in their hands. They borrow money from the Federal Reserve at extremely low rates and then buy Treasury bonds which amounts to making money off the spread or making money off their ability to finance the American government which boils down to us, the American taxpayers.

Fortunately, the US isn't dependent on Japanese or Chinese or Saudi Arabian investors to buy its bonds. Wall Street has taken over that role in a symbiotic Ponzi scheme which requires the Fed, Wall Street and the US Treasury to all play their parts. That means that now the Big Banks are really, really Too Big To Fail. They are an essential part of funding and running the US government!

Better to Put Your Money Under the Mattress

While Wall Street banks are too big to fail, the next banking crisis could trigger not a bail out but a bail in. According to Ellen Brown, the mechanics are already in place to loot depositors' bank accounts:

While the mainstream media focus on ISIS extremists, a threat that has gone virtually unreported is that your life savings could be wiped out in a massive derivatives collapse. Bank bail-ins have begun in Europe, and the infrastructure is in place in the US. Poverty also kills.

At the end of November, an Italian pensioner hanged himself after his entire €100,000 savings were confiscated in a bank “rescue” scheme. He left a suicide note blaming the bank, where he had been a customer for 50 years and had invested in bank-issued bonds. But he might better have blamed the EU and the G20’s Financial Stability Board, which have imposed an “Orderly Resolution” regime that keeps insolvent banks afloat by confiscating the savings of investors and depositors. Some 130,000 shareholders and junior bond holders suffered losses in the “rescue.”

Something to think about. Maybe hiding your money under the mattress is the best solution since it's not earning any interest in the bank anyway.

“The United States is more vulnerable today than ever before including during the Great Depression and the Civil War,” says Thom Hartmann, in “The Crash of 2016.” Why? “Because the pillars of democracy that once supported a booming middle class have been corrupted, and without them, America teeters on the verge of the next Great Crash.” Thanks to an obstructionist GOP, hell-bent on destroying Obama the past six years. [Thom's] indictment hits hard, but matching something you might hear from Rush Limbaugh on the Right.

“The United States is in the midst of an economic implosion that could make the Great Depression look like child’s play,” warns Hartmann. His analysis is brutal, sees that “the facade of our once-great United States will soon disintegrate to reveal the rotting core where corporate and billionaire power and greed have replaced democratic infrastructure and governance. Our once-enlightened political and economic systems have been manipulated to ensure the success of only a fraction of the population at the expense of the rest of us.” And he wrote that before Picketty’s “Capital in the 21st Century.”

The US has a boom bust economy. Unfortunately, the busts are becoming more frequent and the booms more superficial. People get all euphoric when the stock market goes up. As someone once said, it leads to "irrational exuberance." Then when it crashes, they sell leaving their 401ks and retirement incomes in shambles. That's what happens when investing is left in the hands of amateurs. The big guys, the hedge funds will make money either way - when the stock market goes up they go long; when it goes down they're short. They are high frequency traders and act on insider information. They commit fraud.

They have billions of dollars at their disposal from low interest loans from Wall Street. That's why they can buy entire corporations, break them up, lay off the employees, raid their pension funds and sell the remaining eviscerated hulk off to the unsuspecting and naive. The hedge (vulture) funds and Wall Street make out like bandits which is what they essentially are. The banks, whose function used to be capital formation to fund industry which created jobs, now functions as a conduit to hedge funds to wreak havoc with the American economy in pursuit of short term profits.

The world is polarized between the uber wealthy and the rest of us. Just 62 people own as much wealth as the 3.6 billion poorest. That's globalization for you. Nation states are no longer important or in control. The uber wealthy, the billionaires, who can buy and sell politicians and governments at their whim are the controllers. They - not the communists or socialists - are the central planners of the economy, and their plan for the economy is to benefit them and only them. The World Bank and the IMF are their henchmen.

The gap between rich and poor is reaching new extremes. The richest 1 percent have now accumulated more wealth than the rest of the world put together… Meanwhile, the wealth owned by the bottom half of humanity has fallen by a trillion dollars in the past five years.”

The wealth of the richest 62 people has risen by 44 percent in the five years since 2010—that’s an increase of more than half a trillion dollars ($542 billion), to $1.76 trillion,” Oxfam noted. “Meanwhile, the wealth of the bottom half fell by just over a trillion dollars in the same period—a drop of 41 percent. Since the turn of the century, the poorest half of the world’s population has received just 1 percent of the total increase in global wealth, while half of that increase has gone to the top 1 percent.

There is really only one candidate for President who is addressing these issues - Bernie Sanders. Republicans want us to take our eyes off the ball of growing inequality and impoverishment of the 99% while the billionaires take on the role of oligarchs. They want us to focus on international terrorism and the threat that that brings to our everyday lives.

While that is surely a threat, ISIS cannot do major damage to the US. A few people can be blown up here and there and that is a tragedy. It's just not as great a tragedy as the gun violence done by Americans to other Americans on a daily basis which is orders of magnitude bigger.

If the economy takes a tumble, Hillary Clinton's ties to Wall Street will take on an even more ominous cloud over her campaign while the fact that Bernie Sanders has raised millions in small donations without the help of Wall Street or Super PACs will cast him in an even more favorable light. That might be the deciding factor. The Republicans will surely be left behind if they place all their bets on getting the American people to vote for them out of fear of ISIS.

July 10, 2014

Mortgage debt overhang from the housing bust has meant lack of middle-class spending power and consumer demand, preventing the economy from growing. The problem might be fixed by a new approach from the Fed. But if the Fed won’t act, counties will, as seen in the latest developments on eminent domain and litigation over MERS.

Former Assistant Treasury Secretary Paul Craig Roberts wrote on June 25th that real US GDP growth for the first quarter of 2014 was a negative 2.9%, off by 5.5% from the positive 2.6% predicted by economists. If the second quarter also shows a decline, the US will officially be in recession. That means not only fiscal policy (government deficit spending) but monetary policy (unprecedented quantitative easing) will have failed. The Federal Reserve is out of bullets.

Or is it? Perhaps it is just aiming at the wrong target.

The Fed’s massive quantitative easing program was ostensibly designed to lower mortgage interest rates, stimulating the economy. And rates have indeed been lowered – for banks. But the form of QE the Fed has engaged in – creating money on a computer screen and trading it for assets on bank balance sheets – has not delivered money where it needs to go: into the pockets of consumers, who create the demand that drives productivity.

Some ways the Fed could get money into consumer pockets with QE, discussed in earlier articles, include very-low-interest loans for students and very-low-interest loans to state and local governments. Both options would stimulate demand. But the biggest brake on the economy remains the languishing housing market. The Fed has been buying up new issues of mortgage-backed securities so fast that it now owns 12% of the mortgage market; yet housing continues to sputter, largely because of the huge inventory of underwater mortgages.

According to Professor Robert Hockett, who originated a plan to tackle this problem using eminent domain, 40% of mortgages nationally are either underwater or nearly so, meaning more is owed on the home than it is worth. Seventy percent of homes that are deeply underwater wind up in default.

Worse, second mortgages are due for a reset. Over the next several years, principal payments will be added to interest-only payments on second mortgages taken out during the boom years. Many borrowers will be unable to afford the higher payments. The anticipated result is another disastrous wave of foreclosures.

The mortgage debt overhang was the result of financial deregulation and securitization, which created a massive housing bubble. When it inevitably burst, housing prices plummeted, but mortgages did not. The resources of the once-great middle class were then diverted from spending on consumer goods to trying to stay afloat in this sea of debt. Without demand, stores closed their doors and workers got laid off, in a vicious downward spiral.

The glut of underwater mortgages needs to be written down to match underlying assets, not just to help homeowners but to revive the economy. However, most of them cannot be written down, because they have been securitized (sold off to investors) in complicated trust arrangements that legally forbid renegotiation, even if all the parties could be found and brought to agreement.

Reviving the HOLC

The parties themselves cannot renegotiate, but the Fed could. The Fed is already voraciously buying up mortgage-backed securities. What it is not doing but could is to target underwater mortgages and renegotiate them after purchase, along the lines of the Home Owners’ Loan Corporation (HOLC) created during the New Deal.

The HOLC was a government-sponsored corporation created in 1933 to revive the moribund housing market by refinancing home mortgages that were in default. To fund this rescue mission without burdening the taxpayers, the HOLC issued bonds that were sold on the open market. Although 20% of the mortgages it bought eventually defaulted, the rest were repaid, allowing the HOLC not only to rescue the home mortgage market but to turn a small profit for the government.

In 2012, Senator Jeff Merkley of Oregon proposed the large-scale refinancing of underwater mortgages using an arrangement similar to the HOLC’s. Bonds would be issued on the private bond market, capitalizing on today’s very low US government cost of funds; then underwater mortgages would be bought with the proceeds.

For the bonds to be appealing to investors, however, they would need to be at 2-3% interest, the going rate for long-term federal bonds. This would leave little cushion to cover defaults and little reduction in rates for homeowners.

The Fed, on the other hand, would not have these limitations. If it were to purchase the underwater mortgages with QE, its cost of funds would be zero; and so would the risk of loss, since QE is generated with computer keys.

Finance attorney Bruce Cahan has another idea. If the Fed is not inclined to renegotiate mortgages itself, it can provide very-low-interest seed money to capitalize state-owned banks, on the model of the Bank of North Dakota. These publicly-owned banks could then buy up mortgage pools secured by in-state real estate at a discount off the face amount outstanding, and refinance the mortgages at today’s low long-term interest rates.

The Eminent Domain Alternative

The Fed has the power (particularly if given a mandate from Congress), but so far it has not shown the will. Some cities and counties are therefore taking matters into their own hands.

Attracting growing interest is Professor Bob Hockett’s eminent domain plan, called a “Local Principal Reduction program.” As described by the Home Defenders League:

The city works with private investors to acquire a set of the worst, hardest to fix underwater mortgages (especially “Private Label Securities” of PLS loans) and refinances them to restore home equity. If banks refuse to cooperate, cities may use their legal authority of eminent domain to buy the bad mortgages at fair market value and then reset them to current value.

The latest breaking news on this front involves the City of San Francisco, which will be voting on a resolution involving eminent domain on July 8th. The resolution states in part:

That it is the intention of the Board of Supervisors to explore joining with the City of Richmond in the formation of a Joint Powers Authority for the purpose of implementing Local Principal Reduction and potentially other housing preservation strategies . . . .

The MERS Trump Card

If the eminent domain plan fails, there is another way local governments might acquire troubled mortgages that need to be renegotiated. Seventy percent of all mortgages are now held in the name of a computer database called MERS (Mortgage Electronic Registration Systems). Many courts have held that MERS breaks the chain of title to real property. Other courts have gone the other way, but they were usually dealing with cases brought by homeowners who were held not to have standing to bring the claim. Counties, on the other hand, have been directly injured by MERS and do have standing to sue, since the title-obscuring database has bilked them of billions of dollars in recording fees.

In a stunning defeat for MERS, on June 30, 2014, the US District Court for the Eastern District of Pennsylvania granted a declaratory judgment in favor of County Recorder Nancy J. Becker, in which MERS was required to come up with all the transfer records related to its putative Pennsylvania properties. The judgment stated:

Defendants are declared to be obligated to create and record written documents memorializing the transfers of debt/promissory notes which are secured by real estate mortgages in the Commonwealth of Pennsylvania for all such debt transfers past, present and future in the Office for the Recording of Deeds in the County where such property is situate.

IT IS STILL FURTHER ORDERED AND DECLARED that inasmuch as such debt/mortgage note transfers are conveyances within the meaning of Pennsylvania law,the failure to so document and record is violative of the Pennsylvania Recording Statute(s).

Memorializing all transfers past, present and future, probably cannot be done at this late date – at least not legitimately. The inevitable result will be fatal breaks in the chain of title to Pennsylvania real property. Where title cannot be proved, the property escheats (reverts) to the state by law.

Only 29% of US homes are now owned free and clear, a record low. Of the remaining 71%, 70% are securitized through MERS. That means that class-action lawsuits by county recorders could potentially establish that title is defective to 50% of US homes (70% of 71%).

If banks, investors and federal officials want to avoid this sort of display of local power, they might think twice about turning down reasonable plans for solving the underwater mortgage crisis of the sort proposed by Senator Merkley, Professor Hockett and Attorney Cahan.

December 25, 2013

The Federal Reserve and the Bank of England are encouraging food speculation shows clearly how both America’s and Britain’s monetary policies are engineered to work against the interests of the majority, not only at home but internationally.

These are the same criticisms people have been making, with growing clamor, since the Fed initiated its QE spending in 2010. Since the financial crash, both the Fed and Bank of England have been running these stimulus programs — a "money for nothing" technique of buying bonds from toxic banks. As Dyson mentions, the U.K. has created an extra £375 billion for big banks through the spending.

Meanwhile, Professor David McNally of York University Toronto calculates the Fed has pumped an equivalent amount, $600 billion, into Wall Street banks in the course of QE1, QE2 and QE3. He asserts this “hot money” is funding speculators to buy currencies, commodities and assets with the result that it's driving up currencies such as Brazil’s real, funding lands grabs across Africa and Asia, and making food prices soar.

A deeper look at the Fed’s impact on food prices, in fact, illuminates how the private central bank is working as an engine to fund rising inequality worldwide.

To appreciate the consequences that food speculation has had on the majority of the globe's population, I asked Miriam Ross, media officer for WDM in London, to set out its impact. “Speculation has been a major contributor to the sharp spikes in global food prices," Ross said. "When prices of staple foods rise suddenly, everyone is affected. Here in the U.K., for example, prices rose by 32% [between] 2007 to 2012.”

Ross went on, “With incomes failing to keep pace, many people have felt the pinch. But in poor countries, where many people typically spend 50 to 90% of their incomes on food compared to an average of 10 to 15% in rich countries, price spikes can spell disaster. In the last six months of 2010 alone, 44 million more people were pushed into extreme poverty by rising food prices.”

“This does not just mean peoples’ lives are devastated due to a hunger and malnutrition. It causes people to sell off possessions including cattle, take their children out of school, or cut out spending on health care,” she added, and proposed that reducing speculation should be an easy goal for the public to embrace.

“Regulation to curb speculation is on the table on both sides of the Atlantic. Whether or not regulators seize the opportunity to rein in the speculators depends on whether they prioritize the profits of investment banks or the fundamental right of people to food.”

That the Federal Reserve and the Bank of England are encouraging food speculation — and are responsible for its disastrous results — shows clearly how both America's and Britain's monetary policies are engineered to work against the interests of the majority, not only at home but internationally.

An alternative strategy, according to groups like Positive Money, is for the nation's central bank to strategically stimulate parts of the economy and help produce the things that people actually need, like low-carbon emitting forms of transportation, manufacturing, energy production, and so on. If the Fed were federalized, restructured as a public force for investing in the public good, not just Americans but the world's population would have a more hopeful future before it.

As well as being involved with Occupy, Steve is currently writing a PhD criticising Neoliberalism from an indigenous perspective. From Southampton, Steve has also provided legal support to Dan Ashman as part of the OccupyLSX legal case—for which judgement will be delivered sometime after Jan. 11.

December 23rd, 2013, marks the 100th anniversary of the Federal Reserve, warranting a review of its performance. Has it achieved the purposes for which it was designed?

The answer depends on whose purposes we are talking about. For the banks, the Fed has served quite well. For the laboring masses whose populist movement prompted it, not much has changed in a century.

Thwarting Populist Demands

The Federal Reserve Act was passed in 1913 in response to a wave of bank crises, which had hit on average every six years over a period of 80 years. The resulting economic depressions triggered a populist movement for monetary reform in the 1890s. Mary Ellen Lease, an early populist leader, said in a fiery speech that could have been written today:

Wall Street owns the country. It is no longer a government of the people, by the people, and for the people, but a government of Wall Street, by Wall Street, and for Wall Street. The great common people of this country are slaves, and monopoly is the master. . . . Money rules . . . .Our laws are the output of a system which clothes rascals in robes and honesty in rags. The parties lie to us and the political speakers mislead us. . . .

We want money, land and transportation. We want the abolition of the National Banks, and we want the power to make loans direct from the government. We want the foreclosure system wiped out.

That was what they wanted, but the Federal Reserve Act that they got was not what the populists had fought for, or what their leader William Jennings Bryan thought he was approving when he voted for it in 1913. In the stirring speech that won him the Democratic presidential nomination in 1896, Bryan insisted:

[We] believe that the right to coin money and issue money is a function of government. . . . Those who are opposed to this proposition tell us that the issue of paper money is a function of the bank and that the government ought to go out of the banking business. I stand with Jefferson . . . and tell them, as he did, that the issue of money is a function of the government and that the banks should go out of the governing business.

He concluded with this famous outcry against the restrictive gold standard:

You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.

What Bryan and the populists sought was a national currency issued debt-free and interest-free by the government, on the model of Lincoln’s Greenbacks. What the American people got was a money supply created by private banks as credit (or debt) lent to the government and the people at interest. Although the national money supply would be printed by the U.S. Bureau of Engraving and Printing, it would be issued by the “bankers’ bank,” the Federal Reserve. The Fed is composed of twelve branches, all of which are 100 percent owned by the banks in their districts. Until 1935, these branches could each independently issue paper dollars for the cost of printing them, and could lend them at interest.

1929: The Fed Triggers the Worst Bank Run in History

The new system was supposed to prevent bank runs, but it clearly failed in that endeavor. In 1929, the United States experienced the worst bank run in its history.

The New York Fed had been pouring newly-created money into New York banks, which then lent it to stock speculators. When the New York Fed heard that the Federal Reserve Board of Governors had held an all-night meeting discussing this risky situation, the flood of speculative funding was retracted, precipitating the 1929 stock market crash.

At that time, paper dollars were freely redeemable in gold; but banks were required to keep sufficient gold to cover only 40 percent of their deposits. When panicked bank customers rushed to cash in their dollars, gold reserves shrank. Loans then had to be recalled to maintain the 40 percent requirement, collapsing the money supply.

The result was widespread unemployment and loss of homes and savings, similar to that seen today. In a scathing indictment before Congress in 1934, Representative Louis McFadden blamed the Federal Reserve. He said:

Mr. Chairman, we have in this Country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks . . . .

The depredations and iniquities of the Fed has cost enough money to pay the National debt several times over. . . .

Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders.

These twelve private credit monopolies were deceitfully and disloyally foisted upon this Country by the bankers who came here from Europe and repaid us our hospitality by undermining our American institutions.

Freed from the Bankers’ “Cross of Gold”

To stop the collapse of the money supply, in 1933 Roosevelt took the dollar off the gold standard within the United States. The gold standard had prevailed since the founding of the country, and the move was highly controversial. Critics viewed it as a crime. But proponents saw it as finally allowing the country to be economically sovereign.

This more benign view was taken by Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, in a presentation before the American Bar Association in 1945. He said the government was now at liberty to spend as needed to meet its budget, drawing on credit issued by its own central bank. It could do this until price inflation indicated a weakened purchasing power of the currency. Then, and only then, would the government need to levy taxes—not to fund the budget but to counteract inflation by contracting the money supply. The principal purpose of taxes, said Ruml, was “the maintenance of a dollar which has stable purchasing power over the years. Sometimes this purpose is stated as ‘the avoidance of inflation.’”

It was a remarkable realization. The government could be funded without taxes, by drawing on credit from its own central bank. Since there was no longer a need for gold to cover the loan, the central bank would not have to borrow. It could just create the money on its books. Only when prices rose across the board, signaling an excess of money in the money supply, would the government need to tax—not to fund the government but simply to keep supply (goods and services) in balance with demand (money).

Ruml’s vision is echoed today in the school of economic thought called Modern Monetary Theory (MMT). But after Roosevelt’s demise, it was not pursued. The U.S. government continued to fund itself with taxes; and when it failed to recover enough to pay its bills, it continued to borrow, putting itself in debt.

The Fed Agrees to Return the Interest

For its first half century, the Federal Reserve continued to pocket the interest on the money it issued and lent to the government. But in the 1960s, Wright Patman, Chairman of the House Banking and Currency Committee, pushed to have the Fed nationalized. To avoid that result, the Fed quietly agreed to rebate its profits to the U.S. Treasury.

In The Strange Case of Richard Milhous Nixon, published in 1973, Congressman Jerry Voorhis wrote of this concession:

It was done, quite obviously, as acknowledgment that the Federal Reserve Banks were acting on the one hand as a national bank of issue, creating the nation’s money, but on the other hand charging the nation interest on its own credit—which no true national bank of issue could conceivably, or with any show of justice, dare to do.

Rebating the interest to the Treasury was clearly a step in the right direction. But the central bank funded very little of the federal debt. Commercial banks held a large chunk of it; and as Voorhis observed, “[w]here the commercial banks are concerned, there is no such repayment of the people’s money.” Commercial banks did not rebate the interest they collected to the government, said Voorhis, although they also “‘buy’ the bonds with newly created demand deposit entries on their books—nothing more.”

Today the proportion of the federal debt held by the Federal Reserve has shot up, due to repeated rounds of “quantitative easing.” But the majority of the debt is still funded privately at interest, and most of the dollars funding it originated as “bank credit”created on the books of private banks.

Time for a New Populist Movement?

The Treasury’s website reports the amount of interest paid on the national debt each year, going back 26 years. At the end of 2013, the total for the previous 26 years came to about $9 trillion on a federal debt of $17.25 trillion. If the government had been borrowing from its own central bank interest-free during that period, the debt would have been reduced by more than half. And that was just the interest for 26 years. The federal debt has been accumulating ever since 1835, when Andrew Jackson paid it off and vetoed the Second U.S. Bank’s renewal; and all that time it has been accruing interest. If the government had been borrowing from its central bank all along, it might have had no federal debt at all today.

In 1977, Congress gave the Fed a dual mandate, not only to maintain the stability of the currency but to promote full employment. The Fed got the mandate but not the tools, as discussed in my earlier article here.

It may be time for a new populist movement, one that demands that the power to issue money be returned to the government and the people it represents; and that the Federal Reserve be made a public utility, owned by the people and serving them. The firehose of cheap credit lavished on Wall Street needs to be re-directed to Main Street.

The United States is not an economy democracy, however. So there will be no popular vote on who will make the most critical decisions on jobs, investments, interest rates and a host of other defining issues for working families, communities, states and the nation.

But there is a campaign going on. In order to influence the selection of a new chair by President Obama and the Senate confirmation process: contenders are positioning. Camps and caucuses are organizing. Endorsements are being made. Issues are being placed on the table.

So let’s invite the American people into the process.

Let’s tell them how powerful the Fed is, and what it could do to address poverty, unemployment and the economic challenges faced by cities like Detroit.

In response to the threat of bankruptcy that looms for Detroit and other cities, Kildee has argued that the Fed should be actively engaged in developing solutions for cities that are in economic turmoil after decades of deindustrialization and federal and state neglect. “While Detroit’s problems may be extreme, they are certainly not unique,” says Kildee. “Municipalities in Michigan and across the country are increasingly facing insolvency that requires us to rethink the way we support our cities.”

When Fed Chair Ben Bernanke appeared before the House Financial Service Committee in mid-July, the congressman said, “I would ask if you would think about how you would advise Congress or how the Fed itself might pursue policy that would have the effect of potentially avoiding—but certainly mitigating—the economic effect of municipal financial failure.”

Kildee’s point is well taken, not merely with regard to the debate over Detroit—but with regard to the debate over who will head the Fed.

One potential contender for the job, Lawrence Summers, has a record of delivering for Wall Street and the big banks—as an advocate for deregulation, privatization and the elimination of essential regulatory protections such as the Glass-Steagall Act. As economist Dean Baker noted after the economy melted down in 2007 and 2008, “The policies [Summers] promoted as Treasury Secretary and in his subsequent writings led to the economic disaster that we now face.” But Summers is also an over-the-top advocate for the sort of free trade agreements that have left communities across this country with shuttered factories and high unemployment. He’s so disinclined toward the public investments that might renew those communities that Congressman Peter DeFazio, D-Oregon, has said, “Larry Summers hates infrastructure.”

So count Summers out.

There are better choices, such as Janet Louise Yellen, who in her writings and in her tenure as the vice chairman of the Board of Governors of the Federal Reserve System has evidenced a higher commitment to the Fed’s mandate to promote high employment. She’s clearly a candidate—so much so that on Tuesday she got her first newspaper endorsement: from The New York Times.

But Senator Bernie Sanders has suggested a pair of dark-horse contenders who—in a real race for the Fed chairmanship—would offer working Americans a genuine choice.

Declaring that “it’s time for new leadership at the Federal Reserve and a new approach to our troubled economy,” Sanders has identified Nobel Prize–winning economist Joseph Stiglitz and former US Labor Secretary Robert Reich as “excellent candidates” to replace Chairman Ben Bernanke when the chairman finishes his term January 31.

“We need a new Fed chair who will act with the same sense of urgency to combat the unemployment crisis in America today that has left 22 million Americans without a full time job,” argues Sanders. To that end, Sanders rejects Summers as a contender, writing to President Obama that “it would be a tragic mistake to nominate anyone as chair of the Fed who continued those failed policies. Instead, we need a new chair who will have the courage to hold Wall Street accountable for their fraud, recklessness and illegal behavior, and stand up for the needs of ordinary Americans.”

But Sanders also recognizes that in the race for the Fed chairmanship progressives should have a contender. Or, perhaps, two.

“As you consider whom to nominate as the next chair of the Federal Reserve, I urge you to consider someone who will put the needs of the disappearing middle class ahead of the interests of Wall Street and the wealthy few,” Sanders wrote to the president. “There are a number of excellent candidates who are capable of doing that. Nobel Prize economist Joseph Stiglitz and former US Secretary of Labor Robert Reich are just two names that come to mind.”

The reality is that, while the names of Stiglitz and Reich come quickly to the mind of Sanders and other progressives, they may not be at the top of the White House list. But they should be. On the immediate issue of Detroit, Reich has written brilliantly on the importance of recognizing, “in an era of widening inequality,” that the real question is whether Americans are going to “[write] off the poor” who reside in urban America. On the broader question of the economy, Stiglitz is arguing that “so-called ‘free trade’ talks should be in the public, not corporate interest.”

Those are not ideas that are now at the center of the discussion about who should head the Fed.

But they should be.

And they can be.

This is the point of treating the race for the Fed chairmanship as an election, rather than an anointment.

By putting Stiglitz and Reich in the running, Sanders invites organized labor and economic justice and urban policy groups to join the debate. By highlighting the progressive economic approaches advanced by Stiglitz and Reich, as an alternative to those advanced by Larry Summers, they expand the understanding of what the Fed can and should do—for Detroit, for cities across the country and for neglected rural communities.

Treating the race for Fed head as a race, as a real campaign, invites citizens into the process.

Urging the selection of Stiglitz or Reich might not lead to the actual choice of a progressive-populist as Fed chair. But it could turn the tide against Summers. It might help Yellen. And it would almost certainly create pressure on whoever takes charge of the Fed to recognize and embrace the full potential of the Federal Reserve.

John Nichols is the author, with Robert W. McChesney, of Dollarocracy: How the Money and Media Election Complex is Destroying America (Nation Books). Lisa Graves, executive director of the Center for Media and Democracy says: “The billionaires are buying our media and our elections. They’re spinning our democracy into a dollarocracy. John Nichols and Bob McChesney expose the culprits who steered America into the quagmire of big money and provide us with the tools to free ourselves and our republic from the corporate kleptocrats.”

July 30, 2013

"Four years after the [Great Recession of 2008] median family income has fallen by 10 percent in real terms. ...[T]he number of full-time breadwinner jobs in the US economy is still down by 5 million; that is, it is more than 8 percent below its late 2007 level. In short, the Main Street economy has been failing for years, and now the massive debt deflation [the paying down of debt rather than consuming] under way will aggravate that condition enormously [since GDP is 70% consumption], leaving millions of citizens to depend on intermittent employment in low-paying part-time jobs or to fall back on family, friends, charity, or nothing at all." - David Stockman, The Great Deformation.

A breadwinner job is a job that is sufficient to support a family including rent or mortgage, car payment, adequate food and nutrition, health care, education and savings for retirement. That meant a job paying $50,000 a year in 2007 when the US economy peaked. At that time there were 71.8 million "breadwinner" jobs in construction, manufacturing, white-collar professions, government and the like. These jobs accounted for more than half of the nation's 138 million total payroll.

Breadwinner jobs are the foundation of the Main Street economy. But after losing 5.6 million of these jobs during the Great Recession, less than 4 percent of these jobs have been recovered. The 3 million jobs recovered since the recession ended in 2009 have been mainly in part-time work, temp jobs and in health, education and social services (the HES complex).

More than half of the recovery (1.6 million jobs) occurred in the part-time economy which presently includes 36.4 million jobs in retail, hotels, restaurants, shoe-shine stands, barrista kiosks and temporary help agencies where the average annualized compensation was only $19,000. The balance consisting of 1.1 million jobs was in the HES complex which consists of 30.7 million jobs in health, education and social services. Average compensation in these jobs was about $35,000. annually. These jobs are almost entirely dependent on government spending and as such are subject to being eliminated at the whims of a deficit cutting Congress. That leaves only approximately 300,000 breadwinner jobs created since the Great Recession!

A family would need two of the HES type jobs to be the equivalent of one breadwinner job or three temp or part time jobs to be the equivalent. Simply put this is why both the husband and the wife need to be out in the workforce whereas a generation ago only one member of the household needed to be in the workforce with the other member (usually the wife) staying home raising the children and taking care of the house. This is what women's liberation has wrought! Two members of the household in the workforce and nobody taking care of the children.

According to a report in ProPublica, roughly 2.7 million temp workers are currently employed in the US — a sector that’s roaring back 10 times faster than private-sector employment as a whole. Many temp workers start work with the promise of a full time job after a 3 month or 6 month probationary period - only to find their times extended to the point where they can be at the same worksite for years, but as an employee of the temp agency with no benefits, vacation or raises. More and more companies are turning to temp labor to avoid the insurance costs and other obligations of a full-time staff. Even nurses, cooks and professors are being hired as temp workers.

Temp workers have few rights. Complaints to management are frequently referred to the temp agency itself and are not subject to being considered at the company where the temp worker has actually been working. They are not day laborers looking for an odd job from a passing contractor. They are regular employees of temp agencies working in the supply chain of many of America’s largest companies – Walmart, Macy’s, Nike, Frito-Lay. They make our frozen pizzas, sort the recycling from our trash, cut our vegetables and clean our imported fish. They unload clothing and toys made overseas and pack them to fill our store shelves. They are as important to the global economy as shipping containers and Asian garment workers.

Many get by on minimum wage, renting rooms in rundown houses, eating dinners of beans and potatoes, and surviving on food banks and taxpayer-funded health care. They almost never get benefits and have little opportunity for advancement.

Across America, temporary work has become a mainstay of the economy, leading to the proliferation of what researchers have begun to call “temp towns.” They are often dense Latino neighborhoods teeming with temp agencies. Or they are cities where it has become nearly impossible even for whites and African-Americans with vocational training to find factory and warehouse work without first being directed to a temp firm.

In June, the Labor Department reported that the nation had more temp workers than ever before: 2.7 million. Overall, almost one-fifth of the total job growth since the recession ended in mid-2009 has been in the temp sector, federal data shows. But according to the American Staffing Association, the temp industry’s trade group, the pool is even larger: Every year, a tenth of all U.S. workers finds a job at a temp agency.

A healthy Main Street economy depends upon growth in breadwinner type jobs, but there has been none. The Bureau of Labor statistics (BLS) reported 71.8 million breadwinner jobs in January 2000, but 7 years later in 2007,after the huge boom in the housing, real estate, household consumption and stock market sectors, there were still exactly only 71.8 million jobs of this type.

To be sure, the economy did grow during this period. Nominal GDP grew by 40% or about $4 trillion. However, outstanding debt grew by $20 trillion during this same period. So the economy was being pushed along by a torrent of debt far exceeding any real economic growth due to rising productivity and earned income.This debt tsunami which induced only modest GDP growth makes it clear that the Fed policy of increasing debt in order to "grow the economy" is a total failure. As people pay down their debt (debt deflation) instead of buying more stuff, GDP growth will suffer. GDP growth in the real economy is much more modest than reported GDP because 8% of GDP (in 2010) was contributed by financial services, primarily Wall Street speculation and hedge fund activities which often tear down the real economy for the benefit of speculators. Case in point: Twinkies are back on store shelves after being taken over by a hedge fund and unionized workers being laid off. See "Twinkies' Twisted Tale: Junk Food Devoured by Junk Bonds"

While the Federal Reserve has pumped cash into the big Wall Street banks and the upper one percent of wealthy investors, very little of this money has trickled down to Main Street. One of the Fed's missions is to increase employment. However, the American economy has been almost entirely bereft of job growth. For the entire 12 year period since early 2000, it has generated a net gain of only 18,000 jobs per month, a figure that is just one eighth of the labor force growth rate. The only thing happening on the "jobs creation" front in the last 10 years in addition to the massive creation of temp and part time jobs is a huge creation of the bedpan and diploma mill brigade which consists of employment in nursing homes, hospitals, home health agencies, and for-profit colleges.

The sunny job creation statistics cited by the Fed and by anxious politicians eager for good sounding economic news are a complete sham. The fact is that monetray policy in the US is all about fueling the speculative urges of Wall Street, not about the economic health of Main Street. This obfuscation is especially true with respect to the oft cited figure of the creation of 3 million jobs since the recession ended. What they don't tell you is that the majority of these jobs were part-time jobs in bars, restaurants, retail emporiums and temporary employment agencies which supply most of the factory and warehouse jobs for the likes of Microsoft, Amazon and Wal-Mart.

The recovery, such as it is, has been fueled by the massive creation of debt in the hopes that consumers will be persuaded to borrow and spend since 70 percent of US GDP is comprised of consumer spending. If instead consumers choose to pay down personal debt (debt deflation) which is the smart thing to do, the American economy will go into recession. The Federal Reserve is trying to levitate the economy by gigantic infusions of free money into the Wall Street casino in the hopes of creating another real estate bubble or a bubble of any sort really. Please give us a bubble, any bubble. The only economic activity that Fed chief Bernanke is producing with his helicopter free money drops is speculation on Wall Street. The inflation of speculative bubbles will only lead to another bubble pricking collapse since the smart fellows at the Fed and in the government did not learn anything from the economic collapse of 2008.

The American people should not stand for another too-big-to-fail government bail-out of Wall Street. The next time that happens there may be a revolution to go along with it. People are getting tired of the fondling of Wall Street while the people get gypped. In particular they have been gypped lately with the huge accumulation of student loan debt and the refusal to write down any homeowner mortgages while foreclosing mightily instead. What we need is not catering to the Wall Street speculative economy of the 1%, but consideration for the Main Street economy of the 99%. A recent San Diego Free Press Article about an unconditional basic income for the masses would be an antidote to the massive giveaways of free money to Wall Street.

July 07, 2013

The US Federal Reserve Bank is the central bank of the US. It's mission is to control the nation's monetary policy i.e. the amount of money circulating in the economy, and to maximize employment. It does this by raising or lowering interest rates. When interest rates are low, there is more money in circulation and it's cheaper to borrow. Low mortgage rates encourage home sales and they also encourage the sale of large consumer items such as cars. For the economy to improve, consumers have to borrow money from the banks for home mortgages or car loans. This drives up GDP because 70% of GDP is personal consumption. But at the same time debt is created because, after all, economic activity is being created in return for consumers going into debt. This is the only mechanism by which the Fed can encourage economic activity: the creation of more debt.

Low interest rates also tend to lead to inflation which, depending on circumstances may be either a good or a bad thing. Also the more money there is sloshing around, the more encouragement is given to speculation. When interest rates are high, there is less money in circulation, fewer sales of homes and autos and inflation is tamped down. The Fed also provides liquidity to the big banks. As such it is the banker's bank. That was its original purpose. It has morphed into a Chief Tinkerer of the economy taking the place of the capitalist free market. The Fed is involved in the central planning of the US economy and as such it represents the economic politburo.

Since 70% of US Gross Domestic Product (GDP) is consumption, when the Fed lowers interest rates, consumption and (theoretically) employment goes up. But it doesn't seem to be working that way today. The unemployment rate at 7.6% remains stubbornly high. Since it had lowered interest rates all the way to zero and that had still not produced the desired results, the Fed adopted a new policy: Quantitative Easing (QE). For all intents and purposes quantitative easing is simply printing money and adding it to the system. The Fed has been adding $85 billion each month. Before we can assess the consequences of forcing this much liquidity into the system, we have to understand what fiat money is.

All the money in the system is what is called fiat money. This means that a dollar is worth a dollar just because the US government says it is. Up until 1971, the dollar was backed by gold. Theoretically, at least, you could take $35 dollars to a bank and walk out with an ounce of gold. Then President Nixon took the US off the gold standard. He closed the gold window. From that point on all US dollars in the system became ipso facto fiat money. When the Fed prints money, it is simply creating fiat dollars not backed by gold or anything else. Then in 1973 the US government abandoned fixed exchange rates in favor of floating currencies. That means that a currency only has value relative to some other currency. The value of a dollar is measured in terms of how many euros or pounds or yen it can buy.

The creation of floating rate currencies opened the door for speculators to enter in. They sold futures contracts which would be a hedge against changes in the exchange rate. This was the beginning of the financialization of the economy.

Conservatives are appalled by fiat money. They want a return to "sound money" such as that backed by the gold standard. Others are appalled by the way fiat money is created by the Fed and injected into the system. What the Fed does is to buy up government bonds mainly from the big Wall Street banks. So the Fed printing presses are essentially printing money and loaning it to the Wall Street banks on very favorable terms. Meanwhile, savers suffer because interest rates are essentially zero. This is another way of facilitating the transfer of wealth from the middle class and poor to the rich.

Wall Street loves low interest rates. If the Fed were to raise interest rates, it would cause chaos in the bond market since the value of exisiting bonds would diminish. This is why some experts think Ben Benanke, the Fed chairman, will go on with his QE policy of giving Wall Street $85 billion a month indefinitely. Wall Street has completely captured the Fed. On June 19th Bernanke hinted that he would raise interest rates some time near the end of the year because the economy is looking to be stronger and in better shape and the stock market fell over 200 points. The next day it fell 353 more. Hiroku Tabuchi writing in the New York Times reported on June 11 that the Bank of Japan might also raise interest rates and the stock market there fell as the result of "concern about the potential end of economic stimulus in general."

"Constrained neither by gold nor by a fixed money growth rule, the Fed in due course declared itself to be the open market committee for the management and planning of the nation's entire GDP. In this Brobdingnagian endeavor, of course, the Wall Street bond dealers were the vital transmission belt which brought credit-fueled prosperity to Main Street and delivered the elixir of asset inflation to the speculative classes. Consequently, when it came to Wall Street, the Fed became solicitous at first, and craven in the end.

"Apologists might claim that [free market economist] Milton Friedman could not have foreseen that the great experiment in discretionary central banking unleashed by his disciples in the Nixon White House would result in the abject capitulation to Wall Street which emerged during the [former Fed chairman] Greenspan era and became a noxious, unyielding reality under Bernanke. But financial statesmen of an earlier era had embraced the gold standard for good reason: it was the ultimate bulwark against the pretensions and follies of central bankers."

Others such as Ellen Brown, author of Web of Debt, have argued that the problem is not with the creation or printing of fiat money per se. The problem is with how that fiat money is put into circulation. Presently, it is praactically given to Wall Street in the hopes that it will be loaned out to consumers who will consume and thus increase GDP and raise employment. This doesn't seem to be happening. Since the production process has been automated, computerized and robotized, factories can churn out consumer products with little need for human workers. Consumer items that require intense worker participation have been farmed out to Third World countries such as Bangladesh where workers are exploited.

So rather than inserting printed fiat money into the banking sector where it sloshes around fueling speculative greed and never reaches the Main Street economy, why not insert it at the level of productive activity such as rebulding infrastructure? This could be accomplished by putting the money into an infrastructure bank instead of a Wall Street bank. The amount of money printed under these circumstances would have nothing to do with not pissing off the bond market but would have everything to do with increasing employment and worker participation in the economy.

So rather than printing money for speculative purposes, which is essentially what the Fed and other central banks are doing today, the money could build actual public wealth in the form of a smart hardened power grid, the build-up of solar and wind power generation, high speed rail, hardening of storm prone electrical systems, replacing obsolete bridges etc. The money could also go to teachers' salaries, police and firemen salaries and other worthwhile projects. By spending money directly into the system, no debt is incurred and many jobs are created directly instead of the indirect methods used by today's Fed which aren't being effective in creating jobs.

The limitation on printing fiat money would either be full employment or building excessive, unneeded and unused physical structural capacity. Other countries notably China and Japan are today using fiat money for purposes of building or rebuilding infrastructure rather than loaning it to speculators in the hopes that some good will come from it. In China there is overbuilding resulting in excess housing capacity, whole uninhabited cities. The problem then becomes what to do with workers after all building needs have been met. At that point only transfer payments from the rich to the poor can achieve the result of keeping money circulating through the economy. When money is inserted into the system at the worker level, it usually ends up being taken out of circulation after it is spent at Wal-Mart or equivalents. Transferring the money back into workers' hands allows it to be spent at Wal-Mart again and so keeps the economy moving. After all how much money does the Walton family really need?

Ellen Brown's idea has in fact been already tried in American history. President Abraham Lincoln used fiat money in the form of greenbacks to fight the Civil War, build the transcontinental railroad and create the land grant colleges. By the fact that the government printed the greenbacks and spent them into the system rather than borrowed the money, Lincoln saved the US government a total of $4 billion in interest by printing the money rather than borrowing it.

Brown contrasts a debt based society such as the US where economic activity only improves if people borrow and spend money with a society in which fiat money is spent rather than loaned into the system.

This is from her book: Thomas Edison observed: "If the Nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond plus an additional 20% whereas the currency, the honest sort provided by the Constitution, pays nobody except those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People."

Note that the Federal Reserve, which prints all US money, is privately owned mostly by the big Wall Street banks and that the Constitution gives the US Government, not a private bank, the right to print its own money. Is it any wonder that the Fed is beholden to and controlled by Wall Street. An American central bank should be owned by the citizens of America not Wall Street.

Why aren't the Fed's methods being effective in creating jobs? Job creation according to the Fed is encouraged by getting people to borrow money and buy stuff. The problem is that the stuff can be produced in greater quantities not by hiring more workers but by further automating and robotizing the production process. More consumer buying does not mean more workers are hired. It just means that the machines just have to work harder and smarter.

Printing fiat money and injecting it into the system should theoretically produce inflation since the more money that is available, the more prices will be bid up. That should cheapen the dollar and make it weaker compared to other currencies. But that isn't happening today. Why not? One reason is that the world's other central banks, the Bank of Japan and the European Central Bank are doing the same thing. The other reason is that the dollar is the world's reserve currency. Oil purchases must be made in dollars so the central banks of the world need to hold dollars and not simply exchange them for some other currency that may be more sound. The third reason is that the euro is having terrific problems of its own so exchanging dollars for euros doesn't seem like a wise thing to do at this point in time.

So if the Fed is injecting money into the system at the top and the money isn't being invested for productive (and job producing) purposes, where is that money going. It's going into the financial sector where it is sloshing around and being used for more casino gambling in the same way it was being used when the economy came crashing down in 2008. The Fed thinks it can go on printing money with impunity as long as inflation is not occurring. But there may be other unforeseen consequences that the wise men at the Fed have not taken into account.

What will happen when the Fed discontinues its policy of Quantitative Easing? The potential consequences could be disastrous. The bond market has become addicted to quantitative easing the way an addict becomes addicted to a new drug. In short all hell could break loose. The bond market could plummet since, when interest rates or yields are raised, the value of existing bonds at lower interest rates decreases. Also a huge amount of derivatives are in interest rate swaps. Higher interest rates could trigger defaults on these derivatives in the same way that defaults on derivatives caused the Great Recession. For these reasons some people believe the Fed will never be able to discontinue Quantitaive Easing or else the system will come tumbling down. There is a debt overhang in the economy that is precariously cantilevered over the Main Street economy which could come crashing down if the Fed does not continually prop it up by QE.

Another possible consequence might be that the national debt could increase due to the fact that interest rates on Treasury bonds would go up. Since the Fed is buying up government debt, when the Fed tries to sell all those bonds back into the market, interest rates will go up considerably adding to the government's expenses. But it just might not ever sell those Treasuries; they might repose at the Fed forever. Also the stock market which has ballooned up because interest rates have been so low might collapse when money is taken out to buy new Treasuries at higher yields.

So if the Fed can go on indefinitely printing money and buying up US government debt, why are deficits any problem at all? Why do taxpayers have to worry? Rather than 'borrow and spend' or 'tax and spend', the solution to all our problems may just be 'print money and spend'. When Treasury Secretary Henry Paulson ran around Washington with his hair on fire demanding that Congress pony up $800 billion for TARP, why were taxpayers upset? Come to find out, that was a small sum compared to the $7.7 trillion that the Fed printed up and gave to banks all over the world. So in a sense Dick Cheney was right: deficits don't matter since the Fed can buy up government debt. It then goes into the Fed's black hole never to be seen again or the Fed's roach motel, if you prefer a different metaphor. US debt goes in but it never comes out.

The problem is that eventually the US dollar may not be able to maintain its privileged position as the world's reserve currency. At that point the chickens could come home to roost in the form of hyper inflation induced by all those dollars sloshing around in the world economy. Or the casino economy encouraged by all those sloshing around dollars could collapse again the way it did in 2008. The Dodd-Frank bill which was supposed to rein in the big banks has been effectively neutralized and vitiated by lobbying activity to the point that it is worthless. Also rich investors and speculators from all over the world might decide to abandon the gambling casino and use their winnings to buy up US assets instead. They might use their political influence to privatize public assets, buy them up at fire sale prices and turn around and sell at exhorbitant prices commodities necessary for human survival such as food and water. Democracy might be thrown on the ash heap of history as a new class of robber barons gains control of both the economy and the body politic and turns the public into debt slaves in much the same way that students have been turned into debt slaves by virtue of their student loans.

Frank Thomas replies:

For more effective state and local financing and expansion of local lending capacity, Tim O’Connell suggests a practical option: the Fed should be able buy up municipal bonds rather than restricting its purchases to Treasury and/or Corporate bonds. The publically-owned Bank of North Dakota (BND), founded in 1919, has been doing exactly that for decades now. However, while it’s legal for BND to buy state and municipal bonds — and borrow at the Federal Reserve’s discount window rate and lend directly to local municipal governments at lower interest rates than the municipal bond market provides — the Federal Reserve Act prohibits the Fed’s purchasing of municipal debt with a maturity of more than six months. So none of the real benefits from this creative option of quantitative easing (QE) is achievable — unless the Fed has the authority to buy longer-dated municipal paper.

Other problems are the highly fragmented municipal bond market and the moral hazard of bailing out profligate municipalities or buying low quality bond issues. Experts confirm that many municipal bond issues are illiquid. It is felt, however, these problems are solvable. There’s almost $4 trillion in municipal debt outstanding in U.S. today, representing a Huge marketplace for the purchase of municipal bonds by a BND institution as well as an opportunity to secure reduced interest rates on bonds. I feel that state banks, like BND, which cannot create out-of-air actual money but only credit within the limits imposed by their reserves, are the ideal way to escape our corrupt debt-money accounting mechanism over the long term. I don’t think getting our national government into the game of running a giant banking monopoly is a good idea … nor does Ellen Brown favor this as some suggest. She believes states like California — that deposit hundreds of billions of state revenues in large Wall Street banks which leverage that money, lend it out-of-state, and remit hardly any funds back to the state — are missing a substantial economic opportunity to borrow at a very low cost and to recycle far more taxpayer funds internally to the economic benefit of all Californians.

This is essentially what has happened in North Dakota with its attractive, highly transparent public bank institution long ago started in a predominantly red state. Every state in the union, EXCEPT North Dakota, deposits all its state and local taxes and fees in a private bank. The bulk of these tax revenue deposits — our tax dollars — end up in TBTF Wall Street banks which leverage them with speculative trades (derivative bets)and loans to entities around the world. According to Marc Armstrong, executive director of the Public Banking Institute, more than $1 trillion of state and local tax dollars reach the Wall Street banks. In contrast, all of North Dakota’s tax revenues go through its public state bank which invests these funds in productive investment WITHIN the state economy — e.g., small businesses, public infrastructure partnerships with many community banks. A large part of BND’s profits are remitted to the state’s general fund, easing the pressure of tax increases.

With a population of 700,000, North Dakota has more local banks relative to population than all other states. Over last ten years, lending per capita by small banks (with assets under $1 billion) averaged about $12,000 vs. $3,000 nationally. Over same period, lending to small businesses averaged 434% more than the national average (see: “Bank of North Dakota,” by Institute for Local Self-Reliance, May 5, 2011). In its Partnership in Assisting Community Expansion, BND provides below-market interest rates loans to businesses if, and only if, those businesses create at least one job per $100,000 loaned. Is it any wonder North Dakota’s unemployment rate has been consistently relatively low for many years? If the more than $1 trillion of U.S.-wide state and local tax deposits that now go to Wall Street were deposited in all 50 states using the BND approach, up to 10 million jobs could be created over time. (see: “North Dakota, A Socialist Haven,” by Les Leopold, May 29,2013).

Recently, the Federal Reserve Bank of Boston issued a report advising against a Massachusetts bill to investigate a state bank on grounds that the public bank on its own”could not stop financial crises that directly impact North Dakota, like the one in the 1980s (even if it did alleviate the problems).” The Boston Fed report argued policymakers “would be better off studying the federal programs that have been augmented since the crisis.” In other words, “status quoism, no real reforms! What is the real reason behind the Bosten fed’s decision advanced by some think tanks? The Boston Fed has been accused of playing politics, indirectly playing on the fear that public banks in many states are a threat to big banks as well as community banks.

Of course, nothing could be further from the truth. Evidence shows that big banks are increasingly lending less to small businesses, and federal programs for small businesses are ineffective. North Dakota’s public bank has clearly proven the opposite over many decades. The Association of Community Banks in North Dakota is solidly behind the state’s BND. Assisting and supporting North Dakota’s community banks and credit unions is a fundamental part of BND’s mission — to the extent of participating in 19% of the total loans originated by state’s small and medium-sized local banks in 2010. BND has a relationship with almost all of the state’s 94 local banks! (see: “The People’s Bank, North Dakota’s Public Bank,” by Abby Rapoport, April 1, 2013).

This joint participation enables local banks’ to expand their lending capacity and thus keep their customers when the banks’ businesses grow rather than see customers flee to larger banks. Same applies to residential mortgages. North Dakota’s community banks prefer to sell these mortgages to BND rather than to bank giants like Wells Fargo which are inclined to market their other products and services to community bank customers. BND’s provision of a secondary market for loans originated by local banks frees up local banks’ lending capacity WITHOUT handing customers over to their competitors. BND even has a bank stock loan program to help expand the local ownership of community banks and their capitalization. The goal here is to ensure that long-standing community banks can continue to be owned locally.

In short, North Dakota’s public bank institution has intensified the circulation of money WITHIN the state rather than having taxpayer funds deposited in large banks where they can be excessively expropriated for use OUTSIDE the state.

The public bank concept is complex and still beyond the general public’s understanding at this time. It needs lots of education and a visually simplified graphical illustration of how it works from a bottom-up perspective in order for the common man to get behind it like he did in North Dakota.

But it has truly amazing possibilities as a supplement to our private banking system to bring sustainable fair growth locally at a minimum debt cost. As Sam Munger of North Dakota’s Center for State Inovation says: “While a state bank can’t save a state economy ‘single-handedly,’ the countercyclical nature of the bank will ‘help cushion’ the effect of the next inevitable boom-and-bust cycle. Build it now so it’s in place and can be effective and functioning the next time.”

Latter is not the Fed’s role as Bernanke has often stated. He’s done all he can to lower safe short-term and long-term more risky interest rates to counter deflation and stagnant growth. As he has said,”Most of the economic policies that support robust economic growth in the long-term are outside the province of the central bank.”

May 06, 2013

The Fed’s policy of keeping interest rates near zero is another form of trickle-down economics.

For evidence, look no further than Apple’s decision to borrow a whopping $17 billion and turn it over to its investors in the form of dividends and stock buy-backs.

Apple is already sitting on $145 billion. But with interest rates so low, it’s cheaper to borrow. This also lets Apple avoid U.S. taxes on its cash horde socked away overseas where taxes are lower.

Other big companies are doing much the same on a smaller scale.

Who gains from all this? The richest 10 percent of Americans who own 90 percent of all shares of stock.

But little or nothing is trickling down. The average American can’t borrow at nearly the low rates Apple or any other big company can. Most Americans no longer have a credit rating that allows them to borrow much of anything.

It would be one thing if Apple and other giant companies were borrowing in order to expand operations and create new jobs. But that’s not what’s going on. Apple, remember, is still sitting on $145 billion.

The reason big companies aren’t creating more jobs is consumers aren’t buying enough to justify the expansion. And government is cutting back on spending.

Big corporations are borrowing simply in order to push stock prices up and reward their investors.

It’s a sump pump with the Fed on one end buying up bonds to keep interest rates low, and shareholders on the other end raking in the returns.

Get it? Easy money from the Fed can’t get the economy out of first gear when the rest of government is in reverse.

Trickle-down economics is the first cousin of austerity economics. Austerity is nuts when so many millions are out of work. And as we’ve learned before, trickle-down is a fraud. Nothing ever trickles down.

February 27, 2013

Quantitative easing (QE) is supposed to stimulate the economy by adding money to the money supply, increasing demand. But so far, it hasn’t been working. Why not? Because as practiced for the last two decades, QE does not actually increase the circulating money supply. It merely cleans up the toxic balance sheets of banks. A real “helicopter drop” that puts money into the pockets of consumers and businesses has not yet been tried. Why not? Another good question . . . .

When Ben Bernanke gave his famous helicopter money speech to the Japanese in 2002, he was not yet chairman of the Federal Reserve. He said then that the government could easily reverse a deflation, just by printing money and dropping it from helicopters. “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent),” he said, “that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Later in the speech he discussed “a money-financed tax cut,” which he said was “essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” Deflation could be cured, said Professor Friedman, simply by dropping money from helicopters.

It seemed logical enough. If the money supply were insufficient for the needs of trade, the solution was to add money to it. Most of the circulating money supply consists of “bank credit” created by banks when they make loans. When old loans are paid off faster than new loans are taken out (as is happening today), the money supply shrinks. The purpose of QE is to reverse this contraction.

But if debt deflation is so easy to fix, then why have the Fed’s massive attempts to pull this maneuver off failed to revive the economy? And why is Japan still suffering from deflation after 20 years of quantitative easing?

On a technical level, the answer has to do with where the money goes. The widespread belief that QE is flooding the economy with money is a myth. Virtually all of the money it creates simply sits in the reserve accounts of banks.

That is the technical answer, but the motive behind it may be something deeper . . . .

An Asset Swap Is Not a Helicopter Drop

As QE is practiced today, the money created on a computer screen never makes it into the real, producing economy. It goes directly into bank reserve accounts, and it stays there. Except for the small amount of “vault cash” available for withdrawal from commercial banks, bank reserves do not leave the doors of the central bank.

According to Peter Stella, former head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund:

[B]anks do not lend “reserves”. . . . Whether commercial banks let the reserves they have acquired through QE sit “idle” or lend them out in the internet bank market 10,000 times in one day among themselves, the aggregate reserves at the central bank at the end of that day will be the same.

Reserves are used simply to clear checks between banks. They move from one reserve account to another, but the total money in bank reserve accounts remains unchanged. Banks can lend their reserves to each other, but they cannot lend them to us.

QE as currently practiced is simply an asset swap. The central bank swaps newly-created dollars for toxic assets clogging the balance sheets of commercial banks. This ploy keeps the banks from going bankrupt, but it does nothing for the balance sheets of federal or local governments, consumers, or businesses.

Central Bank Ignorance or Intentional Sabotage?

Another Look at the Japanese Experience

That brings us to the motive. Twenty years is a long time to repeat a policy that isn’t working.

UK Professor Richard Werner invented the term quantitative easing when he was advising the Japanese in the 1990s. He says he had something quite different in mind from the current practice. He intended for QE to increase the credit available to the real economy. Today, he says:

[A]ll QE is doing is to help banks increase the liquidity of their portfolios by getting rid of longer-dated slightly less liquid assets and raising cash. . . . Reserve expansion is a standard monetarist policy and required no new label.

Werner contends that the Bank of Japan (BOJ) intentionally sabotaged his proposal, adopting his language but not his policy; and other central banks have taken the same approach since.

In his book Princes of the Yen (2003),Werner maintains that in the 1990s, the BOJ consistently foiled government attempts at creating a recovery. As summarized in a review of the book:

The post-war disappearance of the military triggered a power struggle between the Ministry of Finance and the Bank of Japan for control over the economy. While the Ministry strove to maintain the controlled economic system that created Japan’s post-war economic miracle, the central bank plotted to break free from the Ministry by reverting to the free markets of the 1920s.

. . . They reckoned that the wartime economic system and the vast legal powers of the Ministry of Finance could only be overthrown if there was a large crisis – one that would be blamed on the ministry. While observers assumed that all policy-makers have been trying their best to kick-start Japan’s economy over the past decade, the surprising truth is that one key institution did not try hard at all.

Werner contends that the Bank of Japan not only blocked the recovery but actually created the bubble that precipitated the downturn:

[T]hose central bankers who were in charge of the policies that prolonged the recession were the very same people who were responsible for the creation of the bubble. . . . [They] ordered the banks to expand their lending aggressively during the 1980s. In 1989, [they] suddenly tightened their credit controls, thus bringing down the house of cards that they had built up before. . . .

With banks paralysed by bad debts, the central bank held the key to a recovery: only it could step in and create more credit. It failed to do so, and hence the recession continued for years. Thanks to the long recession, the Ministry of Finance was broken up and lost its powers. The Bank of Japan became independent and its power has now become legal.

In the US, too, the central bank holds the key to recovery. Only it can create more credit for the broad economy. But reversing recession has taken a backseat to resuscitating zombie banks, maintaining the feudal dominion of a private financial oligarchy.

In Japan, interestingly, all that may be changing with the election of a new administration. As reported in a January 2013 article in Business Week:

Shinzo Abe and the Liberal Democratic Party swept back into power in mid-December by promising a high-octane mix of monetary and fiscal policies to pull Japan out of its two-decade run of economic misery. To get there, Prime Minister Abe is threatening a hostile takeover of the Bank of Japan, the nation’s central bank. The terms of surrender may go something like this: Unless the BOJ agrees to a 2 percent inflation target and expands its current government bond-buying operation, the ruling LDP might push a new central bank charter through the Japanese Diet. That charter would greatly diminish the BOJ’s independence to set monetary policy and allow the prime minister to sack its governor.

From Bankers’ Bank to Government Bank

Making the central bank serve the interests of the government and the people is not a new idea. Prof. Tim Canova points out that central banks have only recently been declared independent of government:

[I]ndependence has really come to mean a central bank that has been captured by Wall Street interests, very large banking interests. It might be independent of the politicians, but it doesn’t mean it is a neutral arbiter. During the Great Depression and coming out of it, the Fed took its cues from Congress. Throughout the entire 1940s, the Federal Reserve as a practical matter was not independent. It took its marching orders from the White House and the Treasury—and it was the most successful decade in American economic history.

To free the central bank from Wall Street capture, Congress or the president could follow the lead of Shinzo Abe and threaten a hostile takeover of the Fed unless it directs its credit firehose into the real economy. The unlimited, near-zero-interest credit line made available to banks needs to be made available to federal and local governments.

When a similar suggestion was made to Ben Bernanke in January 2011, however, he said he lacked the authority to comply. If that was what Congress wanted, he said, it would have to change the Federal Reserve Act.

And that is what may need to be done—rewrite the Federal Reserve Act to serve the interests of the economy and the people.

Webster Tarpley observes that the Fed advanced $27 trillion to financial institutions through the TAF (Term Asset Facility), the TALF (Term Asset-backed Securities Loan Facility), and similar facilities. He proposes an Infrastructure Facility extending credit on the same terms to state and local governments. It might offer to buy $3 trillion in 100-year, zero-coupon bonds, the minimum currently needed to rebuild the nation’s infrastructure. The collateral backing these bonds would be sounder than the commercial paper of zombie banks, since it would consist of the roads, bridges, and other tangible infrastructure built with the loans. If the bond issuers defaulted, the Fed would get the infrastructure.

Quantitative easing as practiced today is not designed to serve the real economy. It is designed to serve bankers who create money as debt and rent it out for a fee. The money power needs to be restored to the people and the government, but we need an executive and legislature willing to stand up to the banks. A popular movement could give them the backbone. In the meantime, states could set up their own banks, which could leverage the state’s massive capital and revenue base into credit for the local economy.

ABOUT Ellen Brown

Ellen is an attorney, author, and president of the Public Banking Institute. In Web of Debt, her latest of eleven books, she shows how the power to create money has been usurped from the people, and how we can get it back. Her websites are http://webofdebt.com and http://ellenbrown.com.

September 29, 2012

Ben Bernanke, Federal Reserve Chairman, has been in the business of printing money. His program is euphemistically called "Quantitative Easing (QE)." In September 2012 Bernanke announced QE3 in which the Fed would purchase $40 billion of mortgage backed securities per month indefinitely. There had been QE1 and QE2 previously, which were one time injections of capital into the nations' money supply. All theses QEs have resulted in one thing: interest rates have been brought down to practically zero. This may be great for people wanting to buy a car or a house, but for savers, like senior citizens, they have been robbed from gaining any interest on their savings accounts. They might as well have put their money in their mattresses. However, the interest that the nation pays on its national debt has certainly been minimized and this has given the US budget deficit, already enormous, a little break.

The purpose of the Federal Reserve is to pursue full employment and stable prices. In practice the only thing the Fed can do to promote full employment is to lower interest rates in the hopes that people will borrow and spend more money. It can promote stable prices by raising interest rates in order to put a damper on inflation. However, inflation is not the present problem. Employment is. QE injects money into the economy at the top in the hopes that it will trickle down to the average person in terms of consumer loans. The general idea of QE is that the Fed buys up financial assets, injects capital into the big banks and lowers interest rates. This should get the economy moving again by encouraging people to borrow money. Only it has not worked out that way. Instead the money injected at the top of the economy, just like the Bush tax breaks for the rich, has resulted in making more money available for speculation.

At the street level the average person has been reluctant to go into even more debt by taking out more loans. This is why Bernanke has been practically begging the Congress to implement a fiscal policy to complement the Fed's monetary policy. A fiscal policy would mean that the Federal government would have to borrow money or go into more debt and then spend that money into the economy in terms of such projects as infrastructure development. A fiscal policy such as this would result in the injection of capital at a lower level than the Big Banks as construction workers would be hired lowering unemployment and presumably increasing GDP. They then might be more willing to take out a car loan, for example. Since the private sector isn't hiring to any great extent, it remains for the government to act as employer of last resort. The only problem is that conservative politicians are deadset against any expansion of government or any increase in government debt, in short, any stimulus. That leaves the situation in a stalemate with Ben Bernanke vainly trying to increase employment by giving money to people who don't need it. This is the policy that Republicans also want to pursue through the tax code: reduce taxes on the rich in the hopes that they will create jobs.

The problem is that neither of these policies - tax breaks for the rich or printing money and giving it to the rich - has worked. Both of these policies inject money into the top of the economy, into the hands of the wealthiest people. Both of these policies are debt based: fiscal policy increases the US national debt by having the government issue more Treasury bonds while getting people to borrow more money to increase GDP increases consumer debt. Ellen Brown critiques the whole idea of a debt based economy in her path breaking book, Web of Debt. She suggests that, instead of the US central bank, the Federal Reserve, being privately owned, Congress itself should own the nation's central bank i.e. the central bank should be publicly owned. All the money that Ben Bernanke prints is fiat money. That is it's not backed by gold or anything else. A dollar is worth a dollar just because the government says it is. So instead of Ben Bernanke's "helicopter money" (another name for quantitative easing which is just dropping money out of the sky), the government itself could issue the fiat money. That way no interest would be involved! The money would just be spent into the economy. When the government issues bonds that are bought up by the Federal Reserve (quantitative easing), it has to pay interest. If the government, instead of the Federal Reserve, issues the fiat money, it doesn't. Because the government and the Federal Reserve have to go through the big Wall Street banks, the banks profit and the people go into debt. If the American people owned the nation's central bank, Wall Street profits and citizens' debts could be eliminated or at least drastically reduced.

The American government has in the past issued its own fiat money. Abraham Lincoln issued fiat money, Greenbacks, that were used to win the Civil War, build the transcontinental railroad and provide the Land Grant colleges. Greenbacks were fiat money, totally. They weren't backed by gold. In the process he saved the nation an estimated $4 billion in interest. Other countries' central banks are owned by their governments, for instance, Japan and China. Even the European Central Bank is publicly owned. Publicly owned central banks can increase the money supply without incurring ever more debt.

Debt-free government-created money was the financial system that got the country through the American Revolution and the Civil War; the system endorsed by Franklin, Jefferson and Lincoln; the system that Henry Clay, Henry Carey and the American Nationalists called the "American system." The government could simply acknowledge that it was pumping money into the economy. It could explain that the economy needs the government's money to prevent a dollar collapse, and that the cheapest and most honest way to do it is by creating the money directly and then spending it on projects that "promote the general welfare." Laundering the money through non-producing middlemen is giving the people's Constitutionally-ordained money-creating power away.

To summarize, the Fed's quantitative easing only enriches the big banks like Goldman Sachs and JP Morgan Chase who use the money to speculate. It does little for the average person including savers who are not able to get any return on their savings. Government money could have been used to bail out under water mortgagees; instead it was used to bail out Wall Street. A central bank that created fiat money and then spent it into the economy to do infrastructure rebuilding and improvement would do more to increase employment and raise GDP than the schemes that the Federal Reserve Bank and the Congress are now capable of because it would inject money at the bottom of the economy and not the top. Currently, both US fiscal policy and US monetary policy are flops.

September 15, 2012

With deficit hawks circling overhead, the responsibility for creating jobs has fallen by default to Ben Bernanke and the Federal Reserve. Last week the Fed said it expected to keep interest rates near zero through mid 2015, in order to stimulate employment.

Two cheers.

The problem is, low interest rates alone won’t do it. The Fed has held interest rates near zero for several years without that much to show for it. A smaller portion of American adults is now working than at any time in the last thirty years.

The biggest beneficiaries of near-zero interest rates aren’t average Americans. They’re still too weighed down with debt to be able to borrow more, and their wages keep dropping. And because they won’t and can’t borrow more, businesses won’t have more customers. So there’s no reason for businesses to borrow to expand and hire more people, even at low interest rates.

The biggest winners are the big banks, which are now assured of two or more years of almost free money. The big banks won’t use the money to refinance mortgages – why should they when they can squeeze more money out of homeowners by keeping them at higher rates? No, they’ll use the almost free money the way they’ve been using it since the housing bubble burst – to make big bets on derivatives. If the bets go well, the bankers make a bundle. If the bets sour, well, you know what happens then. Watch your wallets.

The truth is, low interest rates won’t boost the economy without an expansive fiscal policy that makes up for the timid spending of consumers and businesses. Until more Americans have more money in their pockets, government has to fill the gap.

On this score, the big news isn’t the Fed’s renewed determination to keep interest rates low. The big news is global lender’s desperation to park their savings in Treasury bills. The euro is way too risky, the yen is still a basket case, China is slowing down and no one knows what will happen to its currency, and you’d have to be crazy to park your savings in Russia.

It’s a match made in heaven – or should be. America can borrow money more cheaply than ever, and use it to put Americans back to work rebuilding our crumbling highways and bridges and schools, cleaning up our national parks and city parks and playgrounds, and doing everything else that needs doing that we’ve neglected for too long.

This would put money in people’s pockets and encourage them to take advantage of the Fed’s low interest rates to borrow even more. And their spending would induce businesses to expand and create more jobs. A virtuous cycle.

And yet for purely ideological reasons we’re heading in the opposite direction. The federal government is cutting back spending. It’s not even helping state and local governments, which continue to lay off teachers, fire fighters, social workers, and police officers.

Worst of all, we’re facing a so-called “fiscal cliff” next year when larger federal spending cuts automatically go into effect. The Congressional Budget Office warns this may push us into recession – which will cause more joblessness and make the federal budget deficit even larger relative to the size of the economy. That’s the austerity trap Europe has fallen into.

Why are Republican and Democratic deficit hawks so brain dead? Even the nation’s credit-rating agencies seem to have lost their minds. Last week Moody’s said it would likely downgrade U.S. government bonds if Congress and the White House don’t come up with a credible plan to reduce the federal budget deficit. (Standard & Poor’s has already downgraded U.S. debt.)

Hello? Can we please stop obsessing about the federal budget deficit? Repeat after me: America’s #1 economic problem is unemployment. Our #1 goal should be to restore job growth. Period.

The Federal Reserve Board understands this. And at least it’s trying. But it can’t succeed on its own. Global lenders are giving us a way out. Let’s take advantage of the opportunity.

June 30, 2012

As a young twenty something ingenue at JP Morgan Chase, Blythe Masters was the inventor of the Credit Default Swap (CDS), the financial instrument responsible for almost destroying the global financial system in 2008. Warren Buffett called CDSs and other derivatives "financial weapons of mass destruction." But exactly what are CDSs and how did they function to almost bring down the entire global banking system? CDSs came about from JP Morgan Chase, Goldman Sachs and other large banks' desire to offload risk and thereby strengthen their balance sheets. They would then be in a position to do more deals due to the fact that they would not have to keep so much collateral on their books to back up their deals. If a loan or bet went south, someone else would be responsible for paying off on the insurance policy, not them. Thus they could increase their profits by doing more and more trades without having to worry about paying off on any of them if anything went awry. That would be some other institution's responsibility. A CDS was an insurance policy. Furthermore, you wouldn't even have to be directly involved as a party or counterparty. You could purchase a "naked" CDS. This is like betting on a horse that you don't own and have no financial stake in or responsibility for.

When the big banks entered the subprime loan market, their problem was "how do we get the rating agencies such as Moody's and Standard and Poor's to rate these securities as anything other than trash and make them more attractive to investors?" First, the subprime loans were bundled together and securitized creating Collateralized Debt Obligations (CDOs). Then they were sold off in tranches (slices) to investors. Blythe Masters' invention circa 1996 enabled them to be rated AAA. How they did it was this. The rating agencies might want to have rated the CDOs BBB or CCC, but the banks said to them "How about if we throw in some insurance that these mortgages won't default? Will that raise the credit rating of this worthless junk?" Sure enough the rating agencies said. So part of the package became a CDS which effectively guaranteed the CDO and got it rated AAA. Investors ate up the product never bothering to look at the underlying worthless mortgages. A AAA rating was good enough for them. After all how could they go wrong with a AAA rated investment product? Then as soon as the deal was done, JP Morgan Chase traded off the CDS to someone else like AIG, for instance. No regulator or anyone else ever bothered to ask if AIG had the assets to back up the risk it had taken on and JP Morgan was free to go on and make other trades and deals since the need to back up any of these deals had just been transferred to some other institution. Without a lot of risk weighing down their balance sheets the big banks were free to make more deals, more trades and higher profits.

Insurance companies are the most highly regulated companies on the planet since it is important to know that an insurance company has the assets to back up the policies it writes. However, no one bothered to check if CDSs, which are essentially insurance products, were backed up by anything and this is what in a nutshell caused the financial deluge of 2008. And the regulatory atmosphere during the Bush administration was that no regulation was good regulation. When subprime mortgages went belly up, the investors tried to redeem their CDSs only to find out that the institutions who had pledged to make them whole didn't have the assets to do so. This is what caused Bear Stearns to throw itself at Tim Geithner's and Ben Bernanke's feet in March of 2008 and beg for mercy. They engineered a takeover of Bear by JP Morgan Chase and to sweeten the deal they gave JP Morgan $30 billion. So they said in effect 'here take $30 billion and Bear Stearns and problem solved'. But the problem was not solved. Treasury Secretary Henry Paulson, a free market guy, was upset that Bear wasn't allowed to go bankrupt because of 'moral hazard'. He thought that banks that had gotten themselves in trouble shouldn't come begging to the government to save them. Moral hazard meant that you had to suffer the consequences of your own decisions even if that meant going bankrupt. You couldn't expect the government to bail you out. Unfortunately, this concept ended up being applied more to average citizens than to the big financial institutions.

What happened next was that Lehman, which also had a large portfolio of CDSs came crying to the government. Paulson said, "No bailout. You guys are on your own." and Lehman promptly went bankrupt. But the dominoes did not stop falling there. AIG had a humungus portfolio of CDSs with not a prayer of a chance of backing them up. The dominoes were falling and the regulators in the government had hardly a clue as to what was happening. Why didn't they know anything or have a plan for dealing with the ensuing catastrophe? Because the CDS market was a dark market. They weren't traded on an exchange. Each deal was a private deal between a party and a counterparty with no one else having a clue as to what was going on. Thus trillions of CDSs accumulated on the books of financial institutions without anyone knowing the total amount or whether or not the institutions were in a position to pay them off if need be.

Here's an example of a dark market. Say you're selling a used car. You'd like to get as much as you can for it and your counterparty would like to pay the least. You, being a used car dealer, and your counterparty being an unsophisticated rube, who do you think is going to get the better end of the deal? The dealer of course. Before the era of Kelly's Blue Book there was a dark market in used car dealing. With the advent of Kelly's Blue Book, the market is no longer dark since the counterparty can look up the value of a used car and know about what he should pay. Similarly, Wall Street traders racked up huge profits because their counterparties didn't know they were being screwed. That is why they don't want CDSs traded on an exchange or any light cast on their activities. It would cut down on the Wall Street trader's profits.

After Lehman failed, the crisis got even worse. So Geithner and Bernanke got together, much to Paulson's chagrin, and said fuck moral hazard, we have to bail out AIG to save the system, and they did to the tune of $180 billion which came as did the $30 billion for Bear Stearns from the Federal Reserve Bank. Note that this all happened during the Bush administration long before Geithner became Treasury Secretary under Obama. Who engineered the takeover of the banks by the government? Who was the big socialist here? Bush and Paulson, free market guys, not Obama. Obama wasn't even in office yet. The next thing was that Bernanke said he could not keep on doing this. Paulson would have to go to the US Congress and demand money for future bailouts, and the result of this was the TARP, the Troubled Asset Relief Program, to the tune of $700 billion. Paulson, the free market guy who believed in letting the chips fall where they may, stuffed $125 billion down the throats of the big banks whether they liked it or not. Many of them did not want to accept the money.

Later after Geithner became Treasury Secretary under Obama, he argued that investors should not have to take the least bit of a haircut. All their bets should be paid off in full. The casino's integrity would have to be preserved at any and all costs or no one would ever bet there again. Quel horreur! So what that amounted to was that if you placed a bet that Lehman was going down and you bought a naked CDS and then sure enough Lehman went down, Geithner argued that that investor should be paid in full regardless of how little he paid to place his bet in the first place or when he placed the bet! Geithner totally pussyfooted around the big banks, but of course people who were being foreclosed on got absolutely no relief whatsoever. Main Street which suffered the most from the banking crisis was left to go it alone (remember moral hazard?) while the banks were being stuffed with cash. No banker had to take a cut in salary or miss a bonus. Wall Street got bailed out. Main Street got sold out. Bankers weren't forced to write down mortgage principles or lower mortgage interest rates. Any writedowns were strictly voluntary so bankers for the most part ignored them. In the final analysis foreclosures were far more profitable. Investors could buy up foreclosed properties on the cheap paying cash and make a killing when prices went up again.

And with all the fuss over TARP, and unbeknownst to the general public, Bernanke's Federal Reserve was still stuffing the banks with cash. A lawsuit by Bloomberg News forced the Fed to reveal that it had given $7.7 trillion to banks all over the world to prevent the looming crisis. No wonder the banks recovered so quickly! This made TARP trivial by comparison. A lot of these bets that were paid in full were on naked CDSs. Anyone could buy a CDS not just a party or counterparty to the original loan, and since these markets were dark, no one knows how many insiders walked off with billions when they knew which way the wind was blowing or how little they paid to place their bets in the first place. Such a one was John Paulson, no relation to the Treasury Secretary. He made $4 billion on one bet. He had Goldman Sachs design a CDO which both he and Goldman knew would fail. Then Paulson bet against it. Goldman's traders enthusiastically talked it up to their clients, er uh, muppets who bought it. Goldman itself bet against its own product. Long story short Paulson made $4 billion which Geithner, of course, demanded that he be paid in toto - no haircut for this sleazy bastard. Now Paulson is using his billions under the Citizens United Ruling of the Supreme Court to donate millions to defeat President Obama and promote right wing policies and politicians. You can thank Tim Geithner for insisting on no haircut for Paulson. Ironically, it was Obama’s Treasury Secretary’s policies that enabled Paulson to pocket the big bucks which he is using to defeat Geithner’s boss!

So what about Blythe Masters who created the CDS when she was a young and pretty twenty something. Her career has gone onward and upward. She still works for JP Morgan Chase. She's the current head of the Global Commodities Department and resides in New York City. She takes no blame for her creation of the Credit Default Swap. She blames the parties and counterparties who made inappropriate use of it. It's their fault not hers. It's faulty execution not the fault of the product itself. She goes blithely along with her life. Masters is Board Chair of the NY Affiliate of the breast cancer charity, Susan G. Komen for the Cure, and a member of the Board of Directors of the National Dance Institute.

May 26, 2012

Think back a couple hundred years ago - before industrialization when economic life was much simpler. Let's assume that when a good or service was purchased, that the person who received the money spent it all - no savings. Therefore, money was circulated just like water can be circulated in a closed pipe. If the pipe makes a circle, then all that is needed to keep water flowing through the pipe is a pump. Similarly, when the blacksmith received $10. for shoeing a horse, we can assume that he took that money and spent it at the grocery. The grocer then took that same $10. and spent it with the farmer. The farmer took the money and spent it at the haberdasher's and so on. So the same $10. gets passed around from person to person until it lands back up at the blacksmith's again and the process repeats itself over and over. As long as all the yeoman in any given village have a good or service they can sell and as long as the money flows through the hands of each person in the village, that same $10. is used over and over; it is circulated round and round just like the water in the pipe. As long as the money flows fast enough, everyone can purchase what they need and business is good. GDP is a measure of how many transactions occur in any given year. The faster the money flows through the system, the greater is GDP.

Now what happens when one of the participants saves some of the money instead of spending it all? Then there is less money to flow through the system and economic activity and hence GDP will be lower. The more money that is saved, the more economic activity will decrease until the money supply is inadequate to meet people's needs. It is a well known fact that, when consumers spend more and save less, economic activity and GDP increase. That's why George W Bush sent everybody a check and told them to go out and spend it. When economic activity decreases enough, a recession or a depression occurs. In the US consumer spending accounts for 70% of GDP so, if consumer spending decreases, economic activity decreases. This would happen in the simple economy described above if, instead of the blacksmith spending his money at the grocer's, he saved it instead. So saving decreases economic activity and GDP. There is one caveat to that and that is, if instead of the blacksmith saving the money, he invested it by expanding his business and created a couple of additional jobs. Then those additional workers would also go out and spend their paycheck adding to economic activity.

When the economy goes into recession two things happen. Government revenues from taxes decline and consumers spend less because they have less money to spend. Keynsianism is a philosophy that says that the government should borrow money in a recession and spend it into the economy thus creating jobs and increasing economic activity or at least preventing starvation and dire need. The other way that economic activity can be expanded is for the central bank to loan money to banks which then loan it to businesses who want to expand their businesses thus creating jobs. So money is injected into the economy either by the government borrowing money or by the central bank printing money in the form of a loan. In either case debt is created and the economy becomes a debt based economy.

If we think of money circulating similar to water circulating in a network of pipes, if a business or an individual saves a portion of the money instead of spending it, there is a continual need for money creation to keep up the same level of economic activity. That's why capitalism has to be a growth based economy. When there was one blacksmith for every village, saving money was not a problem since the income from blacksmithing over the economy as a whole was dispersed to many blacksmiths who all spent most of it keeping it in circulation. If one blacksmith captured most of the business - let's say he called his business Blacksmiths Are Us - and franchised it throughout the whole economy, then all the profits would flow to one person - more or less - and money would be continually taken out of circulation necessitating growth and debt based money creation by the government or private businesses just to provide enough jobs to keep money circulating to all people with economic needs. Money saved and not spent is similar to water in a system of pipes entering a cul de sac or black hole from which it never emerges or to being siphoned off never to return to mainstream circulation.

In today's economy money is continually siphoned off by the major corporations who have not only nationalized but who have internationalized. It's as if Blacksmiths Are Us has gone global. That money which is taken out of the real economy goes into the financial economy which is a black hole from which money never emerges again into the real world economy. So there is a continual need for either the central bank to print money (increase the money supply) or for the government to prime the pump with debt based stimulus money (the fiscal method).

In a western capitalist economy there is a continual need for money to be created either by government borrowing and the provision of fiscal stimulus or by means of the central bank loaning money into the banking system. The only problem is that today, when the Federal Reserve (the central bank) loans money to other banks, the money goes not into the real economy where jobs are created but into the financial or casino economy. In other words it goes to rich people like Jamey Dimon of JP Morgan Chase or Lloyd Blankfein of Goldman Sachs who don't spend it in the real economy but who gamble it in the casino economy so it doesn't do too much good for the creation of jobs which provides for the distribution of money to all who need it. A job is seen as the only legitimate means for an economic unit to acquire the money it needs to meet its needs. Of couse, just giving the money to all who need it would increase economic activity and GDP, but that isn't seen as legitimate. Similarly, when the government borrows and spends, the money also does not circulate much since it is soon siphoned off by the Wal-Marts, the Exxon Mobils - the modern day versions of Blacksmiths Are Us - where it ends up in the financial economy. There is no very good way to keep the money circulating in the real economy since large corporations are siphoning it off at every turn which means that either the central bank has to keep printing money or the government has to keep borrowing and spending money, the Keynesian approach.

Therefore, neither the method of giving money to rich people through zero interest loans nor fiscal stimulus requiring more government debt will work in today's economy. Paul Krugman, who advocates fiscal stimulus and more government borrowing, is wrong and the Republican supply siders who advocate giving more money to the rich are also wrong. Obviously, the central bank cannot go on indefinitely printing money because of the devaluation of the currency and subsequent inflation and the government can not go on indefinitely borrowing money because interest on the debt eventually consumes all expenditures so what is the solution? Giving more tax breaks to the rich only compounds the problem of money being siphoned off from the real economy, taken out of circulation and placed in the financial or casino economy where it circulates only among the financial elite. The Republican solution is to speed up the process of redistributing money from the poor and middle class to the rich even more.

The only viable solution is to redistribute the money from rich to poor. The money that has been siphoned off and taken out of circulation by the Wal-Marts and Exxon Mobils of the world needs to be siphoned back into the real economy where it can continue to circulate. Too much money is ending up in the cul de sacs where it never reenters the real economy but instead circulates endlessly in the casino economy among very rich people. 300 years ago when the economy was much simpler and consisted of a yeomenry who provided a good or service and spent all the money they took in, money circulated endlessly in the real economy. Today, Wal-Mart and Exxon Mobil take most of the money out of the real economy in the form of profits. That money leaves the real economy and enters the financial economy which is a big black hole as far as the real economy is concerned. In order not to increase the money supply endlessly or to require the proliferation of new products and services, which provide a temporary increase in economic activity, new jobs and circulation of money to a wider distribution of individuals and families, money has to be recirculated and redistributed into the local real economy. And in order for the Federal Government not to have to borrow money endlessly, it needs to siphon money from the rich who won't spend it and redistribute it to the poor and middle class who will. In this manner the economy needs not to be based so much on debt based growth but can become more of a steady state, balanced economy. Money siphoned off by Blacksmiths Are Us is siphoned back again and redistributed to the local blacksmiths where it can circulate in the real economy again.

Another way the economy can grow without creating debt or increasing the money supply endlessly, which means just fueling the casino economy, is to take Ellen Brown's suggestios from her book Web of Debt, and that is for the central bank to not loan money into the economy with zero interest loans to the big banks, but instead to spend the money into the economy for infrastructure projects and the like. Thus the money supply is increased as needed without the creation of debt.This is the method Abraham Lincoln used to fight the Civil War and to build the transcontinental railroad. It is estimated he saved the nation $4 billion in interest by spending the money into the economy with greenbacks instead of loaning it into the economy at interest.

Taxing the rich amounts to siphoning back money which has been siphoned off from the real economy in the first place and putting it back into circulation amongst a wider distribution of people. The Blacksmith Are Us franchisees supply a uniform blacksmithing experience for weary travelers regardless of which village they happen to be in. As such they take business from the Mom and Pop blacksmiths and concentrate wealth at the central headquarters of Blacksmiths Are Us. We imagine that no matter which village George Washington or Thomas Jefferson was in, they could count on the fact that their blacksmithing needs were met with satisfaction when they shopped at Blacksmiths Are Us. However, this would diminish the amount of money in the real local economy due to the fact that the business of the local blacksmith would diminish since the profits would be shipped elsewhere.

A final note: with all the economic turmoil in Europoe over the eventual default by Greece on its loans and the fact that this could create economic chaos, instead it could be seen as an opportunity for Greece to set up its economy as non-debt based by having its central bank spend fiat money into the economy thus creating jobs and distributing income until the economy picks up steam of its own accord. Thus Greece could drop out of the eurozone with it's western debt based economic methods and align itself more with the non-western world to create a non-debt based society instead of one drowining in debt as it is presently constituted.

April 21, 2012

The American solution to the 2008 financial crisis was flooding the economy with money. There was the TARP, the Troubled Asset Relief Program, a $700 billion bailout of the US' largest banks. But that was only the beginning. Dr. Ben Bernanke at the Federal Reserve bank added another $9 trillion to the money supply with his policy of "quantitative easing" which is just a euphemism for "printing money." The Fed has printed money again and again. There was a follow-up policy, QE2, because the Fed figured it hadn't printed enough money with QE1. In addition to the US Fed, the European Central Bank (ECB) has been printing money to bail out Greece and other vulnerable European economies. The Central Bank of Japan has also been printing money fast and furiously. Both the US Fed and the ECB are legally prohibited from buying up their country's debts directly, but they can loan money to their big banks and these banks can in turn loan money to the respective countries in an indirect "wink-wink" transaction thus getting around the inconvenient limitations imposed by law. As a consequence another layer of interest accrues to the big banks increasing their power and dominance over the world economy to the point that supposedly sovereign countries have become mere dependencies on them.

What does all this money creation do? First, it supposedly offers a stimulus to economies that are verging on recession. But that is not really happening due to the fact that most of this money is simply being siphoned off by the world's big banks, and, instead of stimulating the economy, is simply going into the financial sector fueling even more speculation and contributing to a possible further meltdown and bailout down the road. In Europe the money is simply going to pay down debts incurred by the various countries. Nothing is being done to spur Greece's economy, for example. Instead the Greeks are being subjected to a regime of austerity - firing workers, reducing pensions and generally creating economic malaise for the average Greek citizen. This will force the Greek economy into a deeper recession with the result that Greek indebtedness will only increase requiring another round of bailouts by the ECB.

Another effect of printing money, sometimes called government "fiat money", since it's not backed by gold or anything else, is the debasement of the currency and inflation. In general the larger the money supply, the more inflation there is. This is not a big concern when an economy is in recession, but becomes a greater concern when the economy starts to "heat up." As far as the debasement of the currency is concerned, the dollar is starting to lose value with respect to other currencies. The more fiat money the government creates, the less the dollar will be worth and this has implications for the dollar as the world's "reserve currency."

Ellen Brown has written extensively about the good aspects of fiat money, namely, Abraham Lincoln's use of it to win the Civil War and build the transcontinental railroad. But all fiat money is not created equal. In Lincoln's day his fiat money went directly into the "real" economy. That is it went to average working people to fight a war and create infrastructure. It avoided having to borrow the money and saved the US government $4 billion in interest. There is a difference in the fiat money that the Fed and the ECB are creating today. Their fiat money is going directly into the financial sector instead of into projects that distribute the money to average citizens and workers. In other words in a perverted downward spiral, today's fiat money is going to pay off the world's big banks like JC Morgan Chase and Goldman Sachs and to pay interest on huge debts owed to private bankers. The Lloyd Blankfeins and the Jamie Diamonds of the world are profiting while the average working person and citizen is only going deeper into debt. The money is not "trickling down", making Republican assertions that all we need to do to get the economy booming again is to give more money to the rich, a ridiculous assertion. The only way to get the economy working again is to give the money directly to the average working person, but this possibility is not even on the radar of the world's western economies like it was during the Great Depression. That is, instead of inserting fiat money into the financial sector resulting in huge profits for bankers and miniscule results for the middle class, the money needs to be inserted into the economy directly at the middle class level which is to say in the form of infrastructure development and support programs like food stamps and tax breaks for the middle class.

The dollar is the world's reserve currency only because the US cut a deal with the middle east oil sheiks that oil on the world market would only be traded in dollars. But here too the dollar is being undercut since some countries, notably China, are cutting direct country to country deals which bypass the world oil market and bypass having to purchase oil in dollars. There are also moves afoot to replace the dollar by a basket of other currencies which would compete with the dollar. All of this is not promising for the continuance of the predominace of the dollar. Increasingly, US Treasuries are becoming less desirable as investment vehicles which means that the money printed by the Federal Reserve is increasingly being used just to buy up the US deficit which is the shortfall between Federal government expenditures and Federal tax revenues. So money is being printed just to bridge the gap. Obviously, this can only be a short term solution to US deficit and fiscal problems. For the long term the US economy itself has to produce tax revenues sufficient to balance government expenditures or, more likely, to pay increasingly higher interest rates to attract private investors just as Greece and Spain are having to do.

So as the US money supply is further diluted by quantitative easing, the value of US money is diminishing, dollar-denominated debt is less desirable as an investment and the role of the US dollar as the world's reserve currency is being eroded. European countries are in a similar predicament having become essentially subsidiaries of US and European banks. One of the statistics that substantiates these assertions is that 93% of the income gains since the Great Recession have gone to the upper 1%. In other words most of the money created has gone to the hedge funds, large banks and other elements of the financial sector. This money has not "trickled down" to the real economy. This is the ultimate denouement of the fact that the western world has relied too much on debt basing their economies. Rather than spending from strength which is spending from savings and accumulated wealth which countries with sovereign wealth funds are able to do, western countries and individuals have overspent by going into debt and the accrued interest is only driving them further into debt. The result is that huge amounts of interest are owed to the big banks, and this amount of money is swamping western economies and debasing the values of the dollar, euro and yen.

In a Trillion Euros Didn't Buy Much Time, Rick Ackerman discusses the fact that the US and Europe have both been reduced to the same level. Their central banks are being forced into the position of bailing out the US and the European countries by buying up their debt since private investors are becoming more and more reluctant to buy it. The US Fed is printing money to make up the difference between US government expenditures and what US taxes and private investors are willing to fund and in the European case, the ECB is buying up Greek and Spanish debt that private investors are turning up their noses at. This buying of debt means that central banks are effectively printing money to pay off the big banks which are owed money that US and European citizens as taxpayers don't have the money to pay and which increasingly cannot be borrowed from private investors.

All this supports my contention that the real action in the world economy these days is not with the average worker/consumer. The average person is becoming increasingly irrelevant. Instead the big banks, hedge funds and central banks are where the action is. In the US the big banks were bailed out while practically nothing was done to bail out the average person. Just think of the foreclosure crisis where HAMP, the Home Affordable Mortgage Program, turned out to be a worthless, toothless approach which did more damage to the average home owner by raising hopes which were later dashed than if it had never been enacted. It did almost nothing to protect home owners from being foreclosed on even though most of the foreclosures were fraudulent. In some cases home owners were led on being promised modified mortgages if they would only keep up current payments only to be foreclosed on at a later date instead of being given the revised mortgages they had been promised. The government's attitude was "we have to let the banks do anything they want, even engage in fraudulent activities, because to do otherwise would risk collapse of the entire system." Ellen Brown's plea for the elimination of the debt based, interest oriented economy in favor of public banking favoring fiat money injected into the real economy instead of into the financialized economy seems further and further from any possibility of being realized.

December 31, 2011

Henry Ford said, “It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

We are beginning to understand, and Occupy Wall Street looks like the beginning of the revolution.

We are beginning to understand that our money is created, not by the government, but by banks. Many authorities have confirmed this, including the Federal Reserve itself. The only money the government creates today are coins, which compose less than one ten-thousandth of the money supply. Federal Reserve Notes, or dollar bills, are issued by Federal Reserve Banks, all twelve of which are owned by the private banks in their district. Most of our money comes into circulation as bank loans, and it comes with an interest charge attached.

According to Margrit Kennedy, a German researcher who has studied this issue extensively, interest now composes 40% of the cost of everything we buy. We don’t see it on the sales slips, but interest is exacted at every stage of production. Suppliers need to take out loans to pay for labor and materials, before they have a product to sell.

For government projects, Kennedy found that the average cost of interest is 50%. If the government owned the banks, it could keep the interest and get these projects at half price. That means governments—state and federal—could double the number of projects they could afford, without costing the taxpayers a single penny more than we are paying now.

This opens up exciting possibilities. Federal and state governments could fund all sorts of things we think we can’t afford now, simply by owning their own banks. They could fund something Franklin D. Roosevelt and Martin Luther King dreamt of—an Economic Bill of Rights.

A Vision for Tomorrow

In his first inaugural address in 1933, Roosevelt criticized the sort of near-sighted Wall Street greed that precipitated the Great Depression. He said, “They only know the rules of a generation of self-seekers. They have no vision, and where there is no vision the people perish.”

Roosevelt’s own vision reached its sharpest focus in 1944, when he called for a Second Bill of Rights. He said:

This Republic had its beginning, and grew to its present strength, under the protection of certain inalienable political rights . . . . They were our rights to life and liberty.

As our nation has grown in size and stature, however—as our industrial economy expanded—these political rights proved inadequate to assure us equality in the pursuit of happiness.

He then enumerated the economic rights he thought needed to be added to the Bill of Rights. They included:

The right to a job;

The right to earn enough to pay for food and clothing;

The right of businessmen to be free of unfair competition and domination by monopolies;

The right to a decent home;

The right to adequate medical care and the opportunity to enjoy good health;

The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;

The right to a good education.

Times have changed since the first Bill of Rights was added to the Constitution in 1791. When the country was founded, people could stake out some land, build a house on it, farm it, and be self-sufficient. The Great Depression saw people turned out of their homes and living in the streets—a phenomenon we are seeing again today. Few people now own their own homes. Even if you have signed a mortgage, you will be in debt peonage to the bank for 30 years or so before you can claim the home as your own.

Health needs have changed too. In 1791, foods were natural and nutrient-rich, and outdoor exercise was built into the lifestyle. Degenerative diseases such as cancer and heart disease were rare. Today, health insurance for some people can cost as much as rent.

Then there are college loans, which collectively now exceed a trillion dollars, more even than credit card debt. Students are coming out of universities not just without jobs but carrying a debt of $20,000 or so on their backs. For medical students and other post-graduate students, it can be $100,000 or more. Again, that’s as much as a mortgage, with no house to show for it. The justification for incurring these debts was supposed to be that the students would get better jobs when they graduated, but now jobs are scarce.

After World War II, the G.I. Bill provided returning servicemen with free college tuition, as well as cheap home loans and business loans. It was called “the G.I. Bill of Rights.” Studies have shown that the G.I. Bill paid for itself seven times over and is one of the most lucrative investments the government ever made.

The government could do that again—without increasing taxes or the federal debt. It could do it by recovering the power to create money from Wall Street and the financial services industry, which now claim a whopping 40% of everything we buy.

An Updated Constitution for a New Millennium

Banks acquired the power to create money by default, when Congress declined to claim it at the Constitutional Convention in 1787. The Constitution says only that “Congress shall have the power to coin money [and] regulate the power thereof.” The Founders left out not just paper money but checkbook money, credit card money, money market funds, and other forms of exchange that make up the money supply today. All of them are created by private financial institutions, and they all come into the economy as loans with interest attached.

Governments—state and federal—could bypass the interest tab by setting up their own publicly-owned banks. Banking would become a public utility, a tool for promoting productivity and trade rather than for extracting wealth from the debtor class.

Congress could go further: it could reclaim the power to issue money from the banks and fund its budget directly. It could do this, in fact, without changing any laws. Congress is empowered to “coin money,” and the Constitution sets no limit on the face amount of the coins. Congress could issue a few one-trillion dollar coins, deposit them in an account, and start writing checks.

The Fed’s own figures show that the money supply has shrunk by $3 trillion since 2008. That sum could be spent into the economy without inflating prices. Three trillion dollars could go a long way toward providing the jobs and social services necessary to fulfill an Economic Bill of Rights. Guaranteeing employment to anyone willing and able to work would increase GDP, allowing the money supply to expand even further without inflating prices, since supply and demand would increase together.

Modernizing the Bill of Rights

As Bob Dylan said, “The times they are a’changin’.” Revolutionary times call for revolutionary solutions and an updated social contract. Apple and Microsoft update their programs every year. We are trying to fit a highly complex modern monetary scheme into a constitutional framework that is 200 years old.

After President Roosevelt died in 1945, his vision for an Economic Bill of Rights was kept alive by Martin Luther King. “True compassion,” King declared, “is more than flinging a coin to a beggar; it comes to see that an edifice which produces beggars needs restructuring.”

MLK too has now passed away, but his vision has been carried on by a variety of money reform groups. The government as “employer of last resort,” guaranteeing a living wage to anyone who wants to work, is a basic platform of Modern Monetary Theory (MMT). A student of MMT declares on his website that by “[e]nding the enormous unearned profits acquired by the means of the privatization of our sovereign currency. . . [i]t is possible to have truly full employment without causing inflation.”

What was sufficient for a simple agrarian economy does not provide an adequate framework for freedom and democracy today. We need an Economic Bill of Rights, and we need to end the privatization of the national currency. Only when the privilege of creating the national money supply is returned to the people can we have a government that is truly of the people, by the people and for the people.